Consider the following: TSMC, a $900 billion company on its ADR prices, is experiencing 45% monthly revenue growth and trades at less than 20 times forward PER. MediaTek, collaborating with NVIDIA as per the news overnight for a new top-tier processor, boasts 44% revenue growth and an 18 times earnings multiple. Honhai, trading at a single-digit PE, hired 50,000 people in two weeks recently to prepare for the iPhone 16 launch. These companies are core to the Taiwan market, which saw the highest drop in 57 years last week due to yen carry trade issues. One must remember the above are the news items for the companies in the last week.
In Korea, Samsung’s and SK Hynix’s chip revenues are surging at 79% and 145%, respectively. Samsung Electronics’ earnings forecast has been raised by 33% in three months, yet the stock trades at a single-digit forward PER. It is not always in tech: Hyundai Motor, along with the other group companies, owns most of Boston Dynamics and whose Indian unit alone may fetch valuations comparable to the parent group despite being a small fraction of its revenues and profits, is another leader with great product and innovation excitement.
One could be transfixed by the undervaluation of these stocks, the skittishness of local liquidity, and the focus on potential downturns rather than company-specific news and accelerating revenues as is the wont in their local analyst communities. There is always a chance that before any deserved re-rating, the cycles turn again, and these companies head down even from the current depressed valuations to reflect the cyclical forces.
Alternatively, some may argue, perhaps indignantly, that the stellar growth of hardware companies is not translating into similar gains for application-layer companies, dismissing this trend as an unsustainable bubble. Commentators accustomed to technology revenues mainly accruing in the application layer for the last few decades prefer this route.
Or, one could recognize the need to consider potential structural forces at play that are leading to layoffs in application-layer companies while the hardware counterparts experience phenomenal growth. We argue that despite the inevitable cycles, these trends will intensify with the rise of robotics, mobility, and healthcare innovations taking over soon. And even those who do not hold views as strong as ours need to consider a different balance in their innovation portfolios as a result.
This is most needed, and indeed not heeded, by business groups looking at strategic acquisitions. So far, it is perplexing that acquirers with access to better valuations and lower cost of equity – typically from markets like the US, India, and those from the Gulf – continue to focus on low-growth companies like European telecom companies or acquisitions that would immediately draw the attention of the US anti-trust. Few consider highly critical collaborations with suppliers in Korea and Taiwan with equity participation and strategic arrangements rather than mere vendor relationships.
NVIDIA, collaborating with MediaTek as an example, is an exception, but others in the U.S. and those with strategic national interests, like India, are unlikely to remain forever indifferent. Language and regulation barriers exist, and we know this well given our experience working in these countries, but they are not insurmountable for those willing to explore.
