TSMC set to report earnings drop as chip demand slows – Stock Market News
April 19, 2023 2:27 pm
The world’s leading chip producer, Taiwan Semiconductor Manufacturing Company, will report quarterly earnings on Thursday, April 19th. With the AI revolution being all the rage lately, these results will serve as a bellwether for the entire chip industry. Earnings are expected to have declined from last year, but that might not scare investors as it reflects heavy spending in expansion projects, and the valuation of its shares is attractive.
Global leader
The hype around artificial intelligence has reached fever pitch and TSMC lies at the heart of it. Even though many people have never heard of it, TSMC is the world’s 15th largest company by market capitalization. It produces roughly half of all semiconductors globally and is the leader in the most cutting-edge chips.
It is critical to understand that TSMC is only a manufacturer of semiconductors – a foundry as it is called. Companies such as Apple design their own chips, and then outsource the production of those chips over to TSMC. This means Apple does not compete with TSMC, but rather, is a client.
Overall, most chipmakers are currently experiencing a hangover, with demand slowing and inventories rising after most customers over-ordered and stockpiled semiconductors during the pandemic shortages. Geopolitical tensions between the United States and China have been another thorn for the industry, with the US banning the export of some advanced chips to China.
Slowdown
For the first quarter of 2023, analysts expect TSMC to report a 4.7% decline in earnings per share compared to the same quarter last year, in local currency. Of course, this follows a dramatic increase in profits last year, so some payback now is not overly worrisome.
Some of this softness reflects the enormous investments TSMC is making to build foundries outside of Taiwan and diversify its operations. This spending will pay dividends down the road by allowing the company to scale and insulate itself from geopolitical tensions, but for now, it will be a drag on profits.
Beyond expansion projects eating into profitability though, it’s clear that demand for chips is also winding down. This was highlighted by TSMC’s sales numbers for this quarter, which have already been released and revealed a 15% drop from last year.
Still, it’s worth noting that TSMC has a history of beating earnings estimates, having done so in all four of the preceding quarters. Another beat this time could help lift the company’s shares, in which case the first barrier to the upside might be the recent high of $95.80.
On the flipside, a disappointment or gloomy guidance by management could push the stock lower, turning the focus towards the $85.80 region.
Valuation and big picture
Despite the slowdown in the company’s growth, the valuation of its shares is quite attractive. The stock is trading at 15.2 times forward earnings, while the free cash flow yield is hovering around 5%. Both suggest the stock is relatively cheap, especially when considering the future growth prospects.
One reason behind this ‘discount’ valuation is geopolitical risk related to China. Tensions between Taiwan and China have been rising for years, with Beijing even holding military exercises around the island of Taiwan lately. Any further escalation could inflict serious damage on TSMC, which might explain why investors have been so hesitant towards this stock.
That said, it’s difficult to be bearish when the valuation is so cheap. TSMC is the lifeblood of the modern economy, as it produces the most sophisticated chips. The hype around AI seems a little premature and might take years to be reflected in earnings, but it’s certainly coming.
Geopolitical risk will always hang over TSMC like a sword. Still, this is a company that will power the AI revolution, and it’s trading at a decent valuation.
The world’s leading chip producer, Taiwan Semiconductor Manufacturing Company, will report quarterly earnings on Thursday, April 19th. With the AI revolution being all the rage lately, these results will serve as a bellwether for the entire chip industry. Earnings are expected to have declined from last year, but that might not scare investors as it reflects heavy spending in expansion projects, and the valuation of its shares is attractive.
Global leader
The hype around artificial intelligence has reached fever pitch and TSMC lies at the heart of it. Even though many people have never heard of it, TSMC is the world’s 15th largest company by market capitalization. It produces roughly half of all semiconductors globally and is the leader in the most cutting-edge chips.
It is critical to understand that TSMC is only a manufacturer of semiconductors – a foundry as it is called. Companies such as Apple design their own chips, and then outsource the production of those chips over to TSMC. This means Apple does not compete with TSMC, but rather, is a client.
Slowdown
For the first quarter of 2023, analysts expect TSMC to report a 4.7% decline in earnings per share compared to the same quarter last year, in local currency. Of course, this follows a dramatic increase in profits last year, so some payback now is not overly worrisome.
Some of this softness reflects the enormous investments TSMC is making to build foundries outside of Taiwan and diversify its operations. This spending will pay dividends down the road by allowing the company to scale and insulate itself from geopolitical tensions, but for now, it will be a drag on profits.
Beyond expansion projects eating into profitability though, it’s clear that demand for chips is also winding down. This was highlighted by TSMC’s sales numbers for this quarter, which have already been released and revealed a 15% drop from last year.
On the flipside, a disappointment or gloomy guidance by management could push the stock lower, turning the focus towards the $85.80 region.
Valuation and big picture
Despite the slowdown in the company’s growth, the valuation of its shares is quite attractive. The stock is trading at 15.2 times forward earnings, while the free cash flow yield is hovering around 5%. Both suggest the stock is relatively cheap, especially when considering the future growth prospects.
One reason behind this ‘discount’ valuation is geopolitical risk related to China. Tensions between Taiwan and China have been rising for years, with Beijing even holding military exercises around the island of Taiwan lately. Any further escalation could inflict serious damage on TSMC, which might explain why investors have been so hesitant towards this stock.
Geopolitical risk will always hang over TSMC like a sword. Still, this is a company that will power the AI revolution, and it’s trading at a decent valuation.
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