To The Moon

• TSMC has fallen 16.11% to $160.28 from its all-time high of $191.05.

• However, the year-to-date return of 54% suggests that TSMC is likely experiencing an overdue temporary correction rather than a long-term downtrend.

What You Need to Know About TSMC:

1) US Wants Tougher Trade Restrictions on China

• The recent panic sell-off is mostly due to renewed trade tensions between the US and China.

• According to Bloomberg, the Biden administration is considering more restrictive trade policies on advanced chip technology to China, which will negatively impact companies like TSMC.

• Trump recently commented that Taiwan should pay the US for protection and claimed Taiwan has taken "about 100%" of America’s semiconductor business.

• China now accounts for 16% of TSMC's total net sales in 2Q2024, marking a significant increase from merely 8% during the same quarter last year. Thus, any trade restrictions on China will hurt TSMC’s revenue.

• It is likely we won't see a final decision on export curbs until after the presidential inauguration on January 20, 2025.

• TSMC may receive a spike in orders from China as China wants to front-load more chips in the event of trade restrictions.

• TSMC has nearly a 90% share in manufacturing advanced semiconductors used for AI. The restrictive trade may likely have minimal impact on TSMC as its tech superiority will continue to improve its earnings. For example, TSMC could raise its wafer prices, and it mentioned in the latest earnings call that clients will bear the import tariff if any.

• TSMC may build more fabs or increase its investment in the US to lobby for tariff relief.

2) Good Earnings Guidance

Revenue Guidance:

• FY2024: TSMC raises its full-year guidance and now expects 2024 revenue to increase slightly above mid-20s percent from earlier guidance of low to mid-20 percent.

• 3Q2024: TSMC expects business to be supported by strong smartphone and AI-related demand for their leading-edge process technologies. Revenue is expected to be between US$22.4 billion and US$23.2 billion in 3Q2024, a 32% YoY increase.

Capex:

FY2024: TSMC now expects Capex for 2024 to be between USD30 billion and USD32 billion, compared to USD28 billion to USD32 billion previously, indicating TSMC’s confidence in AI demand.

Profit Margins:

• 3Q2024: Gross profit margin is expected to be between 53.5% and 55.5%.

• TSMC is rumored to raise prices. Morgan Stanley says that TSMC is set to see a rise in gross margins, expected to be at 55.1% in 2025 and 60% in 2026.

3) TSMC’s Market Share and Regulatory Positioning

• TSMC dominates the global foundry market with a 61% market share in 4Q23, according to Counterpoint Research.

• TSMC has more than a 90% share in manufacturing advanced semiconductors used for AI, according to Pictet Asset Management.

• To avoid regulatory antitrust probes, TSMC stated its share of the foundry industry under its new definition was 28% in 2023.

• TSMC redefined its original definition of the foundry industry to Foundry 2.0 in its latest earnings call, which also includes packaging, testing, mask-making, and others, and all IDM excluding memory manufacturing.

• On a side note, TSMC expects its CoWoS advanced packaging capacity to grow at a 60% CAGR in the next four to five years. TSMC’s chip packaging unit is set to become a major growth driver in the future.

Conclusion

• Geopolitical tension will always remain an overhanging risk for TSMC. However, TSMC stock has always managed to rise higher despite all the trade restrictions over the past few years.

• TSMC targets its new cutting-edge process nodes, N2, to arrive by 2H25 and A16 by 2026. These advanced nodes should cement TSMC as the best AI chipmaker.

• The recent sell-off provides accumulation opportunities for long-term investors.

• Bloomberg consensus shows that TSMC has a 12-month target price of $210.15, representing an upside potential of 31.1% relative to yesterday's closing price of $160.28.

Source: Bloomberg, 26 Jul 2024