Analysts Still Upbeat on TSMC Despite Tech Rout

Despite this year's rout in technology stocks, analysts still remain positive on Taiwan Semiconductor Manufacturing Co, the world’s largest contract chipmaker.  Plunging demand for electronics and heightened U.S.-China trade tensions have forced many analysts to cut their earnings estimates for the semiconductor industry this year.  However, that is not the case for Taiwan Semiconductor Manufacturing, as analysts have been raising their sales and profit estimates for the company this year. 

Taiwan Semiconductor Manufacturing (TSMC) has plunged 35% this year and has lost $319 billion in market value since its peak in January, surpassing Tencent Holdings Ltd as Asia’s biggest loser of market value this year.  In addition, tighter U.S. controls over chip exports to China, announced last week, could result in TSMC losing clients or suspending some production in the country. These factors may not be fully reflected in earnings estimates.

Morningstar said, “we can’t rule out the possibility that TSMC could be forced to suspend some of their businesses with Chinese customers.”  China accounts for about 12% of TSMC’s revenue.  By comparison, SK Hynix gets about 30% of its revenue from China, and Samsung Electronics gets about 13% of its revenue from China.

According to Bloomberg data, TSMC shares trade at about 10.6 estimated earnings for the next year, the lowest in more than ten years.  The stock is now cheaper than most of the members of the Philadelphia Stock Exchange Semiconductor Index ($SOX), which tracks the biggest U.S. semiconductor companies.   On Thursday, TSMC will report Q3 earnings and provide guidance for Q4 margins, inventories, and revenue.  Citigroup said the most important question for future earnings would be the potential effect of the ban on U.S. chip exports to China. 

Analysts have cut the average target price for TSMC’s stock by more than 20% since February as investors reassess global demand for smartphones, personal computers, and cars amid rising recession risks.  However, analysts have been reluctant to cut their earnings estimates for TSMC as the company has been gaining market share in advance chips and charging higher prices. Citigroup said, “most of TSMC’s advanced nodes are for U.S. clients such as Apple (AAPL), Qualcomm (QCOM), Advanced Micro Devices (AMD), and Nvidia (NVDA).  However, with more business restrictions, its clients’ business in China could be negatively impacted in the longer term.” 

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