Taiwan Semiconductor Posts Upbeat Earnings on Lower Expenditures

We’re raising our fair value estimate of the company’s stock.

Phelix Lee 19 January, 2024 | 11:33AM
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Key Morningstar Metrics for Taiwan Semiconductor Manufacturing

What We Thought of Taiwan Semiconductor Manufacturing’s Earnings

We’ve raised our fair value estimate for Taiwan Semiconductor Manufacturing TSM to US$151 per share after management provided a better full-year 2024 outlook than we foresaw, thanks to strong AI-related growth and a lowered 2024 capital expenditure budget. The release of AI-capable consumer devices strengthens our belief that the technology is here to stay and the high-growth phase will not end soon.

TSMC’s disciplined approach to capital spending in 2024 should reassure investors concerned with an underwhelming recovery and potential gluts two or three years ahead. As the stock is undervalued, we don’t think it is too late for investors to jump on it. Our long-term bullishness on the firm is unchanged.

Management upped its medium-term AI expectations to high-teens revenue from the mid-teens, citing how more customers are already working on chips made on 2nm processes. We believe TSMC is in the early stages of reaping the benefits that AI brings, as servers are only the initial step of adopting the tech. Smartphones, factory equipment, and low-power outdoor devices will also need different mixes of AI capabilities to complete the hardware ecosystem.

These developments lead us to raise our 2024-27 revenue forecast by 6.5% on average. We are also unfazed by potential oversupply in mature processes like 28nm since TSMC’s definition of “mature” extends to 10nm and most of its offerings are unique in the industry, such as power-efficient chips made on 12nm that can be applied on outdoor sensors.

TSMC anticipates that first-quarter revenue will fall 6.2% sequentially to $18.4 billion. We view management’s first-quarter and full-year revenue guidance of low-to-mid-20s year-on-year growth as achievable. Many 5nm products are migrating to the 3nm process, which we estimate improves the prices of relevant wafers by about 30%.

bulls TSMC Bulls Say

  • TSMC should consistently earn higher gross margins than competitors thanks to its economies of scale and premium pricing justified by cutting-edge process technologies.

  • TSMC wins when customers compete to offer the most advanced processing systems using the latest process technologies.

  • TSMC will benefit from more semiconductor firms embracing the fabless business model and internet giants designing their own data center chips.

bears TSMC Bears Say

  • Although TSMC is the foundry leader, each generation of process technology matures and commoditizes quickly, forcing the company to deal with pricing pressure.

  • TSMC's new approach to diversify production geographically may add cost pressures with little added resilience to stability.

  • Samsung and Intel are committed to heavy capital spending under the support of the U.S. government. SMIC and other state-supported Chinese foundries also lurk as potential threats.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Taiwan Semiconductor Manufacturing Co Ltd ADR177.24 USD2.74Rating

About Author

Phelix Lee  is an equity analyst for Morningstar.

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