Taiwan Semiconductor Stock: Peak of Fear, Uncertainty, Doubt

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Investment thesis

TSM and S&P 500 performance year-to-date

TSM and S&P 500 performance year-to-date

S&P Capital IQ

After peaking in 2021, it’s safe to say that Taiwan Semiconductor Manufacturing Company Limited (New York Stock Exchange: TSM) experienced a tragic correction cadence after reopening. TSM has fell -46.21% year-to-date, with the S&P 500 index also dropping -24.06% simultaneously, indicating peak market pessimism and fear levels. Both stocks also fell during the previous recession, with TSM reporting a -37.47% drop and the S&P 500 a -43.37% drop between August and December 2008.

The gaming and PC markets had already reported demand destruction in Q2’22, with mid-range smartphone segments also being affected. As TSM’s major customers reduce orders from 2023, it looks like the stock could continue to underperform in the near term, made significantly worse by rising inflation, record oil and gas prices and geopolitical tensions between the United States and China.

As recession fears peaked, TSM also faced significant financial challenges, as it previously saw a -11.2% drop in revenue and -10.72% drop in revenue. net year-over-year in fiscal year 2009. Apple (AAPL) refusing to comply with TSM’s 3% price hike from 2023, we could see a further impact on the latter’s forecast, the rise costs affecting its margins. If not, are we witnessing the beginning of a painful split with its main account? Ouch… Although very unlikely.

In the meantime, that doesn’t mean there’s no more hope for the stock market. The September CPI report released in early October could provide the much-needed catalyst for recovery. With the final rate projected by the Fed of 4.6% by 2023, we could see a 75 basis point hike in November, January 2023 moderating with a 50 basis point hike. In other words, it might be safe to assume that most of the pessimism is already priced in, barring a downward revision to the FY2023 outlook.

TSM continues to invest in future growth

TSM Revenue, Net Income, Gross/Operating/Net Profit Margin

S&P Capital IQ

For its upcoming FQ3’22 earnings call, TSM is expected to report revenue of $19 billion and operating margins of 48.7%, indicating a notable increase of 5.79% but a decline of -0.4 points. of QoQ percentage, respectively, otherwise remarkable annual growth. by 27.6% and 7.5 percentage points, respectively.

Understandably, TSM could report improving profitability, with net income of $8.28 billion and net income margins of 43.6% for its next quarter, indicating an increase of 3.88% but a decline of -0.8 QoQ percentage points, respectively. Otherwise, impressive annual growth of 47.5% and 5.9 percentage points, respectively, despite rising inflation.

Cash/equivalents TSM, FCF and FCF margins

S&P Capital IQ

In Q3 2022, TSM is expected to report free cash flow (FCF) generation of $0.26 billion and an FCF margin of 1.4%, representing a massive decline of -94.43% and 30 year-over-year percentage points, respectively. However, these are primarily attributed to the company’s huge investment of $30.39 billion in stated capital expenditure over the past twelve months, with up to $44 billion planborn for FY2022 and $40 billion for FY2023. Still, investors have nothing to worry about, as TSM is expected to generate FCF of $5.08 billion in fiscal 2022, $11.98 billion in fiscal 2023, and $18.57 billion in fiscal 2023. fiscal year 2024, respectively.

Moreover, these aggressive investments would end up being accretive to revenue and bottom line, as seen over the past three years. TSM had spent a total of $62 billion in capital spending to generate 48% revenue growth at the same time, while planning a new $7 billion factory in Japan and a $12 billion one in Arizona. operational from 2024. Impressive indeed, given the insatiable demand for chips once the macro economy improves.

An upward revaluation will occur once Mr. Market wakes up

TSM projected revenue and net profit

S&P Capital IQ

Over the next two years, TSM is expected to record revenue and net profit growth at a CAGR of 16.68% and 19.75%, respectively. It is evident that Mr. Market expects a noticeable reduction in consumer demand, given the -5.89% downward revision to estimates since our previous analysis in August 2022. Nonetheless, improving its net profit margins remain stellar, growing from 32.3% in fiscal year 2019 to 37.6% in fiscal year 2021, eventually settling at 39.6% by fiscal year 2023 .

Meanwhile, TSM is expected to record revenues of $70.45 billion, net revenues of $30.3 billion, and net income margins of 43% in fiscal 2022, indicating impressive annual growth of 23.09%, 40.93% and 5.4 percentage points, respectively. Still, with the market still looking forward, it’s evident that analysts aren’t confident of its delivery from FY2023, given the projected slowdown in year-on-year growth to 10.6% and 1.74%, respectively. This explains the massive correction in equities so far, since the rally was not sustainable at the time. Hindsight seems to always be 20/20.

However, we are a little more optimistic, as the destruction of demand in the personal device segment would only leave room for the capacities available for the automotive and industrial sectors, whose demand has remained unmet so far, as reported General Motors (GM) and Ford (F). The global electric vehicle market is also expected to grow significantly from $246.7 billion in 2020 to $1.31 billion by 2028 at a CAGR of 24.3%, with the 5G market exceeding $1.87 billion in market value by 2030 at an accelerated CAGR of 44.63%.

Although capital spending in the data center market may momentarily slow, we expect these to be temporary headwinds given the sustained digital transformation post-pandemic. The global data center the market size is expected to grow by $615.96 billion at a CAGR of 21.98%, significantly helped by the insatiable demand from North America, which accounts for 35% of market growth through 2026. Therefore, we expect an upward reassessment of the TSM high and low. growth line, once the macro improves and demand returns in H2’23.

In the meantime, we encourage you to read our previous article on TSM, which would help you better understand its market position and opportunities.

  • Taiwan Semiconductor has a war deterrent silicone shield – still a buy
  • Taiwan Semiconductor: 37% sales – Owning one of the largest companies in the world

So, is TSM Stock a buySell ​​or Keep?

TSM 5Y EV/Revenue and P/E Valuations

TSM 5Y EV/Revenue and P/E Valuations

S&P Capital IQ

TSM is trading at a Revenue EV/NTM of 4.54x and P/E NTM of 11.52x, below its 5-year average of 6.67x and 19.65x, respectively. The stock is currently at $69.28, down -52.22% from its 52-week high at $145.00, closing in on its 52-week low at $68.48. Still, consensus estimates remain bullish on TSM’s outlook, given their price target of $103.00 and a 49.60% upside from current prices.

AAPL & TSM stock price 1Y/ 5Y

AAPL & TSM stock price 1Y/ 5Y

S&P Capital IQ

Given that AAPL accounts for 25% of TSM’s annual revenue, they’ve also had an interesting coexistence relationship in their stock performance thus far. While APPL has obviously had better returns so far for the past 5 years at 289.6% and 10 years at 597.4%, TSM has done relatively well with 105.9% and 450.7% , respectively, despite the geopolitical risk of the latter.

Due to volatile geopolitical tensions between China and the United States, we expect TSM to continue to underperform in the near term. The ongoing semiconductor war, the escalation of military tension Taiwanand tax breaks perceived as ‘discriminatory’ for electric vehicles Inflation Reduction Act all contributed to this strained relationship. We don’t expect things to improve in the coming weeks as China Zero COVID Policy continues to disrupt global supply chains. Despite the first of the two world leaders face to face meeting at the end of the year, things remain uncertain, given President Xi Jinping’s decision re-election and the US midterm elections in November 2022.

Therefore, it is safe to assume that there will be more downside at current levels, as the stock has already broken above its previous June lows. Investors with higher geopolitical risk tolerance and a long-term trajectory can potentially nibble at current levels, although we prefer the $50 margin of safety. Stay safe in these turbulent times.

Carol N. Valencia