TSMC Capex Outlook Key to Next Phase of $340 Billion Stock Rally

(Bloomberg) — With Taiwan Semiconductor Manufacturing Co. still trading at pessimistic valuations even after hitting a record high, there’s potential for its upcoming results to lift the stock even higher.

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Some market watchers see the possibility that the world’s largest chip foundry will raise its revenue and capital expenditure forecasts for the year after better-than-expected sales in the last quarter. This would provide evidence that the strong growth fueled by artificial intelligence will be sustained.

As the leading manufacturer of chips designed by Nvidia Corp. and others, TSMC is seen as the main beneficiary of the AI ​​boom. While the current outlook for smartphones and other consumer products remains cloudy, the industry’s ongoing upgrades to increasingly sophisticated circuits are another bright spot.

“The main thing to watch is investment expectations, as they tend to be an indication of the demand they are seeing,” said Xin-Yao Ng, chief investment officer at abrdn. “We still think TSMC is worth buying because the share price gains are supported by fundamentals, where their dominance and technological leadership in the most advanced chip nodes leave them very well positioned to accumulate profits at high rates for longer.”

Read more: TSMC sales rise most since 2022 after AI chip boom

TSMC shares have more than doubled since their October 2022 low, adding $340 billion to the market capitalization of Asia’s biggest stocks. However, it is trading slightly close to its five-year median valuation, at less than 17 times next year’s expected earnings. That compares to more than 28 times the Philadelphia Semiconductor Index, the highest level in 15 years.

The Taiwanese chipmaker will report its full first-quarter results on Thursday, shedding light on sales contributions from various businesses and how profitability has held up as it spends on overseas expansion. Analysts estimate that TSMC’s gross profit margin remained at 53%, the same level as the previous quarter.

Geopolitical risks

TSMC is currently budgeting investments of $28 billion to $32 billion for the full year and expects its revenue to grow at least 20%, reversing the slight decline from 2023. The consensus analyst estimate is $29 billion. Shares of the Taipei-listed chipmaker rose as much as 2.5% on Wednesday ahead of the earnings report.

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The company has ongoing projects to build factories in the US, Japan and Germany as it moves to serve global demand and diversify its geographic presence amid tensions between China and the West.

“TSMC is undervalued as the company’s dominant position in cutting-edge chips is sometimes overshadowed by geopolitical risks,” said Phelix Lee, an analyst at Morningstar Inc. Those concerns were “partially addressed” by recent news that TSMC is receiving US$11.6 billion in donations. and loans for factories in Arizona under the US Chip Act, Lee added.

The put-to-call ratio for TSMC shares has fallen from a March high, suggesting there was more trading in bullish than bearish options contracts, according to data compiled by Blomberg based on open interest. On the sell side, 34 analysts have buy ratings on the stock with a hold and no sell.

“We expect demand and sales growth to be higher for longer than the share price is currently priced,” said Peter Garnry, head of equity strategy at Saxo Bank. “A negative aspect, of course, is the increasing need to de-risk its industrial base outside of Taiwan as its investment needs increase, reducing free cash flows. However, these new chip manufacturing facilities outside of Taiwan are necessary to continue meeting high demand.”

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–With assistance from David Marino and Cindy Wang.

(Updates price-related data; adds Wednesday stock movement, ‘Top Tech Stories’ section)

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