Ghost Global (Domino’s | TSMC)

This week, Karel Zowitsky focused on cheese and chips. Before you get too hungry, these aren’t the chips that you’re thinking of.

Less cheese to make more dough

Even pizza isn’t immune to input cost pressures

If you have ordered a pizza recently, you might have noticed that the cheese isn’t as thick or that the toppings are thin. Restaurants are under pressure and with consumers struggling, the way to improve margins is to cut costs.

Domino’s Pizza, listed on the NYSE, hasn’t been immune to rising interest rates and the effects of inflation. The share price has fallen by over 40% this year. The franchise group has a market capitalisation of around $11.4 billion and is trading on a P/E ratio above 25x. Although food groups tend to trade at structurally high multiples, you need to sell a lot of pizzas to justify a multiple like that.

The pizzas must be priced to perfection. At the very least, Domino’s committing the egregious sin of offering pineapple on pizza might break the share price even further.

In its third quarter, Domino’s reported revenue of just over $1 billion. This is slightly up year-on-year. The gross margin has decreased from 38.6% to 35.7%, largely attributable to increases in input costs and supply chain pressures.

As much as we would love it to be, pizza is not immune to inflation. The good news is that the group is still profitable, with net profit for the quarter of $100 million.

Taiwan Semiconductor Company (TSMC) is still printing cash

The biggest risk is the first part of the name

TSMC is listed on the NYSE with a market capitalization of around $322 billion. In a nutshell, TSMC is the largest manufacturer in the world of electronic chips. These chips are required in almost every single piece of electronic equipment from your smartphone and laptop to your automated vacuum and electric car.

We are currently in a worldwide chip shortage as a result of supply disruptions that were caused over the last two years. This has massive ramifications for manufacturing. Although the chip is one of the smallest components, it is absolutely crucial for essentially every electronic device. If you haven’t been able to get your hands on the latest Playstation 5, now you know why.

Revenue for the third quarter saw a 35.9% increase year-on-year to $20.2 billion. Management expects revenue to be between $19.9 billion and $20.7 billion in the fourth quarter. The most impressive feat for TSMC is that the company is able to produce a net profit margin of 45.8%. The operating margin was 50.6% and management expects it to remain between 49% and 51% for 4Q22.

The share price has lost 50% this year despite the strong financial results. This is partly because the valuation was simply too high. We can’t ignore the fact that geopolitical risks around Taiwan are heating up, with China making worrying noises about the region.

Many of these concepts (as well as the capital intensity of the model) were covered in Magic Markets Premium, with TSMC as just one example in the extensive library of reports. Even though it was covered back in January, the insights are just as relevant today.

You’re obviously interested in global stocks if you’ve made it this far. There’s a library of 50 research reports and podcasts produced by The Finance Ghost and Mohammed Nalla in Magic Markets Premium. For R99/month or R990/year, the full library is available, along with a new show each week.