2023-04-20 12:45:31 ET
Summary
- Taiwan Semiconductor Manufacturing Company Limited's first quarter earnings release witnessed a remarkable resurgence in buying sentiment, despite the company's decision to downgrade its full-year projections.
- With the highly anticipated launch of Apple's iPhone 15 series, investors are likely betting on an inflection point for Taiwan Semiconductor's recovery momentum in the latter half of FY2023.
- Management stressed that its long-term growth estimates do not fully factor in the potential impact of the ChatGPT AI hype cycle.
- Despite Taiwan Semiconductor's promising performance, its upward trajectory has hit a stumbling block. The company has struggled to break above the $100 level as investors face mounting pressure to factor in more significant geopolitical risks discount.
- Given the challenging market conditions and mounting concerns around geopolitical risks, Taiwan Semiconductor appears unappealing at current levels.
Taiwan Semiconductor Manufacturing Company Limited ( TSM ), or TSMC, released its Q1FY2023 earnings earlier today, which saw buyers returning.
Accordingly, TSM is up nearly 4% at writing, as management expressed its confidence that its falling capacity utilization could bottom out in Q2 before staging an inflection subsequently in H2.
Management also alluded to an analyst's reference that the leading pure-play foundry could see a mid-20% YoY growth in H2, bolstered by the ramp of its N3 and N3E nodes, supporting the Apple Inc. ( AAPL ) launch of its iPhone 15 series.
Despite that, it's essential to consider that TSMC downgraded its full-year forecasts for FY23, seeing a revenue decline of "low to mid-single-digit."
As such, investors will need to assess whether the market has priced in these headwinds, even as TSMC remains confident about an uplift from the ChatGPT AI hype moving ahead.
Management stressed that it wasn't prepared to upgrade its long-term 15-20% topline CAGR revision yet, but expects it to "partly include the growth in HPC and AI." As such, management is likely leaving the door open for more opportunities to leverage the AI hype cycle, possibly seeing sustainable growth momentum.
Microsoft Corporation ( MSFT ) was reported to be designing its own AI chips to improve its cost efficiencies, improving its competitive edge against Amazon Web Services, or AWS, of Amazon.com, Inc. ( AMZN ) and Google Cloud of Alphabet Inc. ( GOOGL , GOOG ).
Code-named Athena, the King of SaaS is preparing to make it " available for internal use and OpenAI as early as next year."
As such, TSMC's process leadership should continue to see customers leveraging its technological superiority over arch-rivals Samsung Electronics Co., Ltd. ( SSNLF , SSNNF ) and Intel Corporation ( INTC ), even as it was rumored to be slowing down its CapEx and EUV orders for its Taiwan fabs.
However, management accentuated that it's not adjusting its CapEx guidance of between $32B to $36B. Furthermore, EUV leader ASML Holding N.V. ( ASML , ASMLF ) highlighted in its recent earnings conference that it's not changing its 60 EUV units target for 2023, even as some demand for 2023 could be pushed out to 2024.
Hence, the critical point is that changes to near-term forecasts are likely temporary and not expected to impact TSMC's growth cadence significantly.
As such, we assessed that buying sentiments in TSM should remain positive in the near term, even though we prefer to ascribe a more considerable geopolitical discount to its fair valuation.
By now, keen TSMC investors should know that Berkshire Hathaway Inc. ( BRK.A , BRK.B ) CEO Warren Buffett decided to unload most of the company's holdings due to geopolitical risks, as he articulated in a recent interview .
We had previously updated investors in mid-February that geopolitical risks were likely the most critical considerations underpinning Buffett's decision to get out.
With that in mind, is TSM still a reasonable proposition for investors to accumulate at the current levels, as it remains well above its dislocated/pessimistic lows in October/November 2022?
TSM quant factor ratings (Seeking Alpha)
As seen above, TSM's valuation is not expensive now, as it received a B- rating from Seeking Alpha Quant . It also aligns with our assessment, as TSM's NTM EBITDA multiple of 7.8x is below its 10Y average of 8.2x.
However, market operators have set up a robust resistance zone at the $100 level, implying a potential upside of about 10% from the current levels.
While TSM's price action suggests that buyers who bought the recent March dips are looking to support its recovery momentum, we aren't attracted by risk/reward at the current levels.
We urge investors to consider a more significant discount to account for the geopolitical risks, which likely aren't fully reflected at the current valuation.
However, a drop back toward its December lows or lower (with constructive bottoming price action) could get us more interested in assessing a speculative buying opportunity in Taiwan Semiconductor Manufacturing Company Limited.
Rating: Sell (Reiterated).
Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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Taiwan Semiconductor: Don't Risk Your Money Here