Is Taiwan Semiconductor the Most Important Company on Earth?

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Jan. 13, 2022.

Taiwan Semiconductor Manufacturing (TSM 2.03%) posted record profits in the fourth quarter, but that's not why Motley Fool analyst John Rotonti believes the company is so important. In this podcast, he analyzes the company's commitment to invest more than $40 billion this year to increase manufacturing capacity, as well as the latest news from homebuilders KB Home (KBH 4.15%) and Lennar (LEN 3.52%).

Plus, Motley Fool analysts Deidre Woollard and Matt Argersinger discuss Sun Belt migration, remote work, and other big trends in real estate, along with some investment opportunities to consider.

Chris Hill: Today on Motley Fool Money from housing to office space, We'll take a look at real estate trends and investing opportunities to go along with them. All that and more coming up right now.

I'm Chris Hill, joined by Motley Fool Senior Analyst John Rotonti. Thanks for being here!

John Rotonti: Thanks for having me on the show, Chris!

Chris Hill: We've also got an update on semiconductors, but let's start with a big day in the housing industry. Shares of home builder KB Home up more than 12% this morning after 4th quarter profits came in solidly higher than expected. Revenue was a little light, but KB Home says that 2022 is going to be a good year. When you consider how much we've all been talking about supply chain issues, John, this guidance out of KB Home, I understand why the stock is up.

John Rotonti: I consider this a beat and raise quarter. Like you said, revenue was a little light, but they crushed earnings and then they raised their guidance. They're expecting guidance of midpoint 30% revenue growth for 2022. They've also increased their guidance for return on equity, which is a measure of profitability. In 2021, they did 20%, they're expecting to do 26%, so a 600 basis point improvement year over year. That's just incredible, and I think it shows the pricing power that homebuilders have right now, given the supply demand imbalance. If we go back to microeconomics 101, almost the first day of class, you learn about how supply and demand effects price, and right now, Freddie Mac estimates were 4 million homes short in the US, because we underbuilt coming out of the global financial crisis. I've seen estimates that were anywhere from four million to actually six million homes short at the same time that we're seeing a surge in demand, because millennials are now at that prime home buying age. 

That on top of the fact that COVID and the pandemic has changed living patterns, and now people want to move outside of the cities. Some people want to move outside of the cities to more suburban rural areas where they have more room and more space to work from home, play from home, exercise from home in a socially distanced way. So the combination of massive shortage of supply and surging demand is giving homebuilders pricing power, and so we're seeing an increase in ASPs, average selling prices. Yeah, that's the story with KB Home, and hopefully this is a read through for the rest of the industry that the other homebuilders will have a good quarter as well.

Chris Hill: We'll get to the other homebuilders in a second. For a brief moment there, when they were talking about their guidance, I had this crazy idea that it meant good things for people looking to buy homes, because much like the used car market and therefore the new car market, the homebuying market has just been on fire. Anecdotally, I think we all know people out there who have tried to buy a new home, a bigger home, and have gotten priced out very quickly or ended up paying more than they probably would've in normal times. But to your point on the deficit in homes, it really does seem like when you're talking about nationwide, 4-6 million homes short. Are we going to see the housing market on fire like this for years to come or does it start to cool off at some point?

John Rotonti: There's two views to this. I do think that we're going to see an extended upcycle gross, an extended upcycle, because inventory is so low, because supply is so low. But if you look at where KB Home is trading, it's trading at a price to earnings ratio of six. That suggests that the market thinks we could be at peak earnings. It's an interesting enigma with the homebuilders right now. I'm of the view that we're going to see an extended upcycle for all the reasons we just discussed, the supply demand imbalance, but the market seems to think that we are approaching a peak and that earnings could start trailing off, because a PE of six it's the only explanation I can think of.

Chris Hill: Let's move to a homebuilder that is nearly 10 times the size of KB Home and that's Lennar. No earnings report out of Lennar, but they're increasing their annual dividend by 50%. How good are they at capital allocation? We've seen plenty of times where the news is someone is increasing their dividend by a penny, a couple of percentage points. You got to be confident if you're going to make this stick, if you're going up 50% for an annual dividend, right?

John Rotonti: This is a signal that the management team has a lot of confidence in the company's ability to generate strong and stable cash flows across the cycle so that they can sustain this dividend. No management team wants to have to reduce, suspend, or cut a dividend because that's going across stock no management team wants that and so yes, this is a signal that they think they're going to have really strong, robust cash flows going forward. It is a 50% increase. It's an increase I love to see, because this is a company that I actually admire a lot, Lennar. But to put it into perspective, their dividend payout ratio is very low. They had a lot of room to increase. Before this announcement, I think their dividend payout ratio was well less than 15%, meaning they're paying out less than 15% of their net income as a dividend. This increase will take Lennar's dividend yield, which is different than the payout ratio. The payout ratio is the%age of earnings that they pay out as a dividend. The yield is the dividend divided by the stock price. This will take their dividend yield from about 1% to about 1.4%. It is a nice boost in the dividend yield, but that dividend payout ratio is still very low, and so actually that indicates they have room to improve this dividend much further over time.

Chris Hill: I think you used the word admire with respect to Lennar. We talked previously about KB Home, D.R. Horton is a major homebuilder. What is it about Lennar and the way they run their business that makes you like them more so than the others?

John Rotonti: If I had to put one thing on Lennar that I like more than the others, they have a division which is called LEN X or Lennar X, which is basically a venture capital division, where they invest in different home related technologies, one of which is Opendoor, the leading iBuying company in the world, now that Zillow has closed its iBuying business. We're left with Opendoor and Redfin, and they own a minority stake, but a substantial stake in Opendoor and then a variety of other venture-like investments as well. I like the industry as a whole because they are moving from a asset-heavy land-heavy business model, where they would own and develop land which required a lot of debt to one that is much more land light, so they're owning and developing less land and focusing more on returns on invested capital and returns on equity. We saw that in KB's guidance, where they're increasing their return on equity from 2021 levels by 600 basis points.

Chris Hill: Before we move on to semiconductors, I need you to cure me of something, and you referenced Zillow. When I hear the phrase iBuying, unfortunately I think of Zillow and the debacle of Zillow attempting to roll out their iBuying program and then cutting it back and then suspending it. It was breath taking the speed with which they launched and shutdown their iBuying program. I feel like iBuying is one of those things. My default thoughts should not be Zillow and its debacle with iBuyer. How should investors think about iBuying either on the consumer side or just as something to watch within this industry?

John Rotonti: I don't know, I was bullish on the potential for iBuying to really transform the home buying and selling experience from a consumer standpoint until the Zillow debacle. Now, I'm much less bullish on iBuying. One thing I'll say about Opendoor is they are a pure-play iBuying company. Zillow started as something else. Zillow started as a basically advertising-driven search engine for homes. Then they try to shift into iBuying. Maybe Opendoor will have a better go at it because that's all they do. Maybe they're just better at it. Maybe they are better managed when it comes to that, better organized when it comes to that. The thing I like about Lennar and owning a stake in which I don't have a stake in Lennar, personally. But the thing I like about investing through Lennar is you get some exposure to iBuying through their investment in Opendoor. But you're paying, once again, like a PE of seven or eight or something like that.

Chris Hill: Taiwan Semiconductor posted record profits in the 4th quarter. They also offered upbeat guidance and said they plan to spend up to $44 billion this year to increase their manufacturing capacity. For those unfamiliar with Taiwan Semiconductor, they're the supplier for Apple, Qualcomm, and others of that size and ilk, shares up more than 5% this morning. Is it the record profits, the guidance, the commitment to investing the money or is it some combination of all three that's pushing this stock higher?

John Rotonti: It's all three. Taiwan Semiconductor, and I don't like to speak in superlatives, is probably the most important company on planet earth.

Chris Hill: Wow, really?

John Rotonti: Yeah. Every electronic device in the world has something from Taiwan Semiconductor in it. They manufacture over 50% of all the world's contracted semiconductors, but they manufacturer 90% of the most advanced technological chips, 90%. So they're a really, really important company, especially as we get more and more digital and electronics start pushing into more and more of our daily lives. The other thing I'll say is $44 billion in CapEx is probably, I'd have to check this, the most capital-intensive business on Earth. I'm not aware of another company spending $44 billion in property plant equipment in one year. There may be a few, but I can count on my hand. So there's not a lot. What that signifies, Chris, what that signals, $44 billion in CapEx, that's the demand that they see for their products. They need to build this capacity in order to satisfy demand. Along with that increase in CapEx guidance for 2022, they also increase their long-term revenue guidance from 10-15% up to 15-20%. That's a substantial jump. You see how important a company is when they need to invest $40 plus billion a year in capital to satisfy demand. This is a demand story. It's incredible. The world is short semiconductors and Taiwan Semiconductor is trying to take share and fill that demand.

Chris Hill: This seems like one of those bits of data that whether you're bullish or bearish on semiconductors in the global supply chain, you've got something to work with here because on the bullish side, you look at them raising guidance. You speak of the demand. On the bearish side, they're investing this money, it's not going to increase capacity in the next 12 months. This is a long play and I think that for a company of this size, you want to see this type of investment. But this isn't going to dramatically move the needle on semiconductor production in 2022, is it?

John Rotonti: No. You're exactly right. Some of this CapEx is going to go toward building next-gen chips, which they aren't even selling yet. So these three nanometer and these two nanometer chips, right now the size of the chips they're selling are in the seven nanometer and five nanometer space. So a lot of this, like you said, far out, it takes over a year and between $10 and $20 billion to build one of these fabrication facilities. It's extremely capital-intensive. Currently, Taiwan Semiconductor only has one competitor for the world's most leading edge chips and that's Samsung. They will soon have Intel as well. Intel says they are going to get into the space. But right now it's a duopoly and Taiwan Semiconductor is far and away the leader. They have 90% market share of the world's most advanced chips.

Chris Hill: Last thing and then I'll let you go. Taiwan Semiconductor, I feel like they are akin to NVIDIA in the sense that both companies are worth more than $600 billion each. But they're not nearly as well known to consumers and even investors as other companies of that size. When you think about consumer names like Facebook, I'm sorry, Meta Platforms, that we're supposed to call it now. But these are enormous companies. From a stock perspective, it's had a tremendous run. Do you look at Taiwan Semiconductor as a stock people should look at right now or is this one of those times where, it's like, I don't want to say you have to have a strong stomach, but it's a little frothy right now maybe?

John Rotonti: No, sure. If you have a long enough time horizon, which I'll define as at least five-years. You're willing to hold the stock for five years, Yes. I think now is a good time to look at Taiwan Semiconductor. Thirty seconds, I'll just say you mentioned NVIDIA. Taiwan Semiconductor is a platform that they allow their customers to acquire much more value than Taiwan Semiconductor keeps for itself. For example, Jensen Huang, the CEO of NVIDIA has a quote and it's, "There's basically air and Taiwan Semiconductor." That's how important NVIDIA sees Taiwan Semiconductor to its own business. It was a platform before Amazon Web Services was a platform.

Chris Hill: This is why I love talking to John Rotonti. Thanks for being here.

John Rotonti: Thank you, Chris. I hope I can come back soon.

Chris Hill: After an historic year for real estate investing, what can investors expect in 2022? Among other things, a sea change in commercial real estate. Deidre Woollard has more.

Deidre Woollard: Thanks Chris. I'm Deidre Woollard, and I'm here with Lead Real Estate Analyst, Matt Argersinger. Matt 2021 was a pretty strong year for real estate in the stock market.

Matt Argersinger: It certainly was Deidre, If you look at the Vanguard Real Estate ETF, which is a benchmark that we follow when we're looking at real estate investments, it was up over 40%, it was its best year ever, and that index has been around for about 16 years. If you look at the National Association of REITs, which is another index, it had its second best year on record of 41%, extraordinary year for real estate, and REITs in 2021. REITs have a great track record for those listening who might not be familiar with REITs, real estate investment trust. If you factor in 2021, they've returned on average 13.5% per year since 1972, so almost 50 years worth of data that outperforms S&P 500. It was a great year for real estate in 2021, but really, real estate investing has been doing well for investors for decades.

Deidre Woollard: REITs were bouncing back from a pretty hard 2020, and some of the impact of COVID-19.

Matt Argersinger: Yeah. Fair to point that out, I think 2020 was a difficult year for real estate. It was one of those sectors that was more acutely affected than other industries. Just because, if you think about retail real estate, hotels, hospitality, office, is one that's still suffering from the effects of the pandemic. 2020 was a very, very difficult year, REITs were down in the high single digits on average that year. I expected, I think as you did, that 2021 was going to be better, and it certainly was. I don't think we thought it was going to be this good or historically good as it was though.

Deidre Woollard: Exactly, well, let's talk about some of those trends that were most interested in. The first one, I feel like is one that's both pandemic-driven, but also was already in process for years before that, and that's Sun Belt migration. People moving to Texas, Florida. Redfin came out with their hottest neighborhoods recently, I think most of them were in Florida. Lot of really interesting activity happening in the Sun Belt right now.

Matt Argersinger: Yeah, that's right. I mean, as you said, this was happening before the pandemic. We saw all trends population. If you look at U-Haul data, which is a cool dataset that you and I look at now and then it was all heading down toward the Sun Belt markets to Southeast to Southwest, away from the coast, and what the pandemic did is, it really just accelerated that trend. Suddenly you had a lot of workers who are used to living in the big coastal gateway markets. Your San Franciscos, Los Angeles's, your New Yorks, your Bostons, and all of a sudden, they had a lot more flexibility with their job, and they can work remotely wherever they thought would be best for them, and that meant looking for, in lot of cases, cheaper places in the South-Southwest or in the inner parts of the country, or just places that they have a better life, they prefer to live and still be a productive employee. 

Those trends really, really took off with the pandemic, they've not ceased, and we'll continue to see this big swell, population rolled down to those other markets, and what you're also seeing in a lot of those places is there's just not enough houses. There are not enough houses at all in the country to meet the demand out there. But especially in those markets as hot demand markets, you mentioned Florida and Texas. If you look at places like Austin, Texas, Houston Dallas, Fort Worth, or if you go to Florida, and you look at Miami or Tampa, there's just so much demand for housing, there's not a lot of it. There's demand for apartments, you're seeing home prices go up, you're seeing apartment rent surge, and unfortunately developments just not going to be able to meet that demand. You're going to see, I think, again, rising home prices, rising rents, especially in those markets.

Deidre Woollard: Cheaper rents, hopefully bigger apartments, warm weather, if investors were looking to bet on some of those trends, what's one idea they could take a look at?

Matt Argersinger: I think one idea that comes to mind is Mid-America Apartment Communities, tickers, MAA, it's the biggest owner operator of apartments in the country actually. But they have so much exposure, about 90% of their assets are in the "Sun Belt region", and that's where they've been focused for for decades now. As the largest apartment owner and operator in those markets, I think they've been a huge beneficiary of this demand, their occupancy rates are at record, rents, in a lot of their markets are up double-digits, if not even 20% more in a lot of places, and I think that's going to continue. Mid-America Apartment Communities, it's had a nice run as a stock, but I could see more upside as this trend plays out.

Deidre Woollard: Now, our last trend, I feel like it's pretty much COVID-driven, and that's the impact of remote work on the office real estate sector. A lot of companies we're planning to have people come back in January that's been pushed back. Some companies have just given up on announcing deadlines of return at all, and yet at the same time, I've seen a flurry of big office leases from companies like Meta, Roku, in markets like New York, and Los Angeles. What's going on here?

Matt Argersinger: It is the most confusing part of the real estate market, for a lot of reasons, as you pointed out Deidre. I mean, we know what the pandemic has done with the work from home, and hybrid work schedules, and what that means for office occupancy, which is so low right now. Yet a lot of these technology companies out there, and life science companies out there are leasing office space at record paces, and to me that's not surprising. But I think if we step back, and look at the office market, I really do think if we past peak office, so to speak. No matter where you look, what surveys you read or what economists you read, the prevailing thought is that companies are going to lease less office space today, and in the future than they did prior to the pandemic. 

It's a real major sea change for the industry. I don't think we understand the full implications of this, but the real short-term implication is that we have too much office square footage in this country, a lot of it needs to be transitioned to probably apartments, as you're seeing in certain cities, or maybe even to hospitality, or maybe that office just gets converted to co-working spaces. It's not necessarily a dedicated corporate office or corporate headquarters anymore, it's a place where employees come to collaborate on an offer team basis, and so that's the state of office right now. Now, there are parts of the office market that I think can do well. Technology, R&D, life science, medical offices. We're actually in a position after pandemic to actually need more of that kind of office. There are parts of the office market that I think are going to work. Again, co-working is probably going to do well, medical office flex spaces. But the traditional office building, I think, is going to probably become a thing of the past, believe it or not.

Deidre Woollard: Well, you can't do your medical research at home, and that's one of the reasons that you, and I are both excited about life sciences, and the growth in that sector. I know that you, and I both have a favorite in this category, let's talk about it.

Matt Argersinger: Sure, my favorite has always been for a long time, and that's Alexandria Real Estate Equities, ticker ARE, it's the leading real estate REIT for life sciences, and technology, They really cater to, if you think about companies like Moderna or Pfizer who led the vaccine front, or companies like Facebook, that are doing all innovations, Meta, I keep calling it Facebook, Google, these are the companies that really lease from Alexandria Real Estate, and we see that demand has not fallen off. Alexandria Real Estate occupancy has never been higher, it's had no problem collecting rents throughout the entire crisis, which is such a departure from other office REITs which did suffer. I love it, it's got a founder-led management team, or even outperforming the market for decades now at this point, and even though the stock has had a really nice run, and it's a little bit expensive, maybe from just some valuation points of view, but it's one that I like very much, and it's really taking advantage of this trend toward life science office.

Deidre Woollard: Absolutely. They had recent big deal with Moderna in Cambridge Massachusetts, they're really focused in all of the markets where life science is booming.

Matt Argersinger: That's right. You mentioned Moderna, I think it's a 500,000 square foot new headquarters of building in Cambridge, and it's going to be owned, and operated by Alexandria Real Estate.

Deidre Woollard: Love it. Well, always a pleasure to talk real estate with you. Thanks, Matt.

Matt Argersinger: Thanks, Deidre.

Chris Hill: That's all for today, but coming up tomorrow, earnings season officially kicks off with financials. Jason Moser and Maria Gallagher will be here to break it all down. As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening, we'll see you tomorrow.