To The Moon

Two Goldman analysts wrote in a report on Sunday that they expect TSMC's revenue to grow 26.1% this year and raised their target price to NT $1,035 from NT $1,028.The new target implies a 68% upside room from it's Dec. 30 closing price. As a result,TSM rose 6.77% to $128.44 on Jan. 4.

What shocked us most is that TSM is getting a nice boost today alongside heavy trading even without any news surrounding the company today.The stock is now trading at $133.4,investors who bullish TSM are ready to the moon.

To better understand TSM's 2022, we can analyze it from the following three dimensions:

1.Chip's strong demand will continue in 2022.

TSM achieved 24.6% growth in 2021 and this strong growth is likely to continue in 2022, its CEO confirmed on the 21Q3 earnings call:

• We are entering a period of higher structural growth. Trends in 5G and HPC-related applications are expected to drive huge demand for computing power.

TSM has strong demand in all major segments such as smartphones, HPC, IOT and self-driving cars. While the smartphone market may be in a more mature state, there are opportunities for growth in the other three markets as well.

• According to Hyperion Research, the HPC terminal market will continue to grow at 8 percent annually to reach a $40 billion market by 2025, which includes multiple sub-markets such as servers, data storage, middleware and applications.
• 5G will continue to drive IOT growth over the next decade -- McKinsey expects 5G IOT units to increase from 3 million in 2022 to 248 million in 2030. Applications range from factory automation systems to medical devices, cameras, and other B2B applications.
• Rapid changes in the automotive industry over the past few years have required more advanced semiconductors to support EV and autonomous driving technology. As demand for sensors, storage devices and other advanced technologies increases, Mordor Intelligence expects the $37 billion market to grow at an annual rate of 17 % through 2026.

2.There are still many opportunities in the chip market.

In its latest earnings report, TSMC noted that it accounts for only 15 per cent of the global automotive IC market and that iot currently accounts for only 9 per cent of TSMC's total revenue.TSMC is well positioned in these growing markets because it continues to lead in the latest chip technology. TSMC has mass-produced 7nm and 5nm chips earlier and in higher volumes than its biggest rival Samsung. On top of the $100bn in capital spending committed over the next three years, TSMC will also continue to maintain its technological edge.

3.Inventory and political risks are unlikely to occur in the short term

During periods of chip shortage, there is always a risk that demand will reverse in the medium term as a result of overproduction -- but this is unlikely. TSMC management remains confident that a recession is unlikely because they have these advantages:

• Overall, customers are likely to be prepared for higher inventory levels in the future to safeguard supply security as they see supply chain disruptions when shortages occur.
• Lead times for chips increased 75 percent on average to 52 weeks, and are not expected to stabilize until at least the first half of 2023.
• A huge number of demand represents new opportunities and applications, not just increased production of existing products such as smartphones.

Early before the signal indicating the shortage of chips, McKinsey published a paper about how new technology in the next 10 years will support the semiconductor industry. Including the prediction that OEM will get 40-50% of the technical value from AI; McKinsey predicts that AI will create a $67 billion revenue opportunity for OEM by 2025 (an annual growth rate of 18-19%).

Oversupply shouldn't be a problem, especially for leaders like TSMC. From a geopolitical point of view, the situation seems more controversial.

There is still room for TSM price after the updated guidelines

The $100bn capex programme does have some impact on earnings and valuation modelling. But considering TSMC's guidance for 2022 revenue and gross margin, the stock still has about 13% upside room from:

Beyond that, TSMC's revenue forecast is likely to be conservative as a 20 percent price increase and higher demand will keep wafer utilization high. In addition, TSMC's AA-/Aa3 credit rating allows them to borrow at low cost, which is a benefit to finance their capex plans (and reduce their total cost of capital) in the bond market, if needed.

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