Weakness in Global Semiconductor Demand May Linger

Taiwan Semiconductor Manufacturing Co (TSM), the world’s biggest chipmaker, reported its first quarterly revenue miss in two years on Tuesday.  The shortfall suggests that a global slowdown in semiconductor chip demand may linger.  TSMC is regarded as a bellwether for global chip demand, and its outlook has an outsized impact on its peers. 

TSMC, the exclusive supplier of Apple’s (AAPL) silicon chips for iPhones and Macs, may have also been affected by problems at Apple’s assembly operations in China.  Apple was forced to cut output estimates after a surge in Covid infections at the Zhengzhou plant.  TSMC reduced its capital spending plans by about -10% to $36 billion, and some analysts have warned the company may further delay expenditure on expansion this year.

Some analysts have turned wary about TSMC’s prospects.  Last week, Goldman Sachs and UBS Group AG said they expect TSMC’s sales to be flat this year.  According to Bloomberg data, analysts have cut their price targets for TSMC by -39% over the last 10 months to the lowest in two years.  TSMC will release Q4 earnings results on Thursday, and analysts will look for clues to chip inventory levels, which have hurt industry margins.

There are concerns that TSMC’s profitability may weaken as it expands some production to the U.S. and other markets.  Last month, TSMC kicked off mass production of next-generation chips, increased its investment in Arizona to $40 billion, and said it would construct a second factory there.  TSMC is under pressure to diversify the geographic distribution of its chipmaking as customers are worried about their technological reliance on Taiwan, an island that China has threatened to invade.  Shin Kong Investment Trust said, “we view its plans to set up overseas plants as an uncertainty to its margin, as costs and expenses of plants in the U.S. and Japan are higher than in Taiwan.”

Yet, there are reasons for optimism about TSMC’s share price.  The shares are trading at 13.5 times estimated earnings, well below its five-year average of 20.  Its shares have also underperformed peers like Samsung Electronics and GlobalFoundries (GFS), which could spark some value buying of TSMC. Also, China’s reopening may lift global chip demand.  Cathay Securities and Futures said, “the key is to see when chip inventory will return to normal levels.  Another key is TSMC’s 2023 capex.  If the company’s capex grows at least 10% from last year, investors will see it as a positive signal.” 

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