(Bloomberg) — With Taiwan Semiconductor Manufacturing Co. still trading at pedestrian valuations even after hitting an all-time high, it’s possible its upcoming results will push the stock even higher.
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Some market watchers are considering the possibility that the world’s largest chip foundry will raise its revenue and capital spending forecasts for the year following its better-than-expected sales last quarter. This would prove that strong growth fueled by artificial intelligence will be sustainable.
As the main manufacturer of chips designed by Nvidia Corp. and others, TSMC is seen as one of the biggest beneficiaries of the AI boom. Although the current outlook for smartphones and other consumer products remains unclear, another bright spot is the industry’s continued upgrades to ever-higher-performance circuitry.
“The main thing to watch is investment expectations, as they tend to be an indication of the demand seen,” said Xin-Yao Ng, chief investment officer at abrdn. “We still think TSMC is worth buying as the stock price gains are supported by fundamentals, where their dominance and technological leadership in the most advanced chip nodes leaves them very well positioned to generate profits at higher rates for longer.”
Read more: TSMC sales rise the most since 2022 after benefiting from AI chip boom
TSMC shares more than doubled from their October 2022 low, adding $340 billion to the market capitalization of Asia’s largest stock. Still, it’s trading slightly near its five-year median valuation, at less than 17 times next year’s expected earnings. That compares to more than 28 times for the Philadelphia Semiconductor Index, a 15-year high.
The Taiwanese chipmaker will release its full first-quarter results on Thursday, highlighting the sales contribution of various businesses and how profitability has held up against its overseas expansion spending. Analysts estimate that TSMC’s gross profit margin remained at 53%, the same level as the previous quarter.
Geopolitical risks
TSMC currently plans a capex budget of between $28 billion and $32 billion for the full year and expects revenue to grow by at least 20%, reversing the slight decline in 2023 The consensus estimate from analysts is $29 billion. Shares of the Taipei-listed chipmaker rose 2.5% on Wednesday ahead of the earnings release.
The company has ongoing plans to build factories in the United States, Japan and Germany, aiming to meet global demand and diversify its geographic presence amid tensions between China and the West .
“TSMC is undervalued because the company’s dominance in advanced chips is sometimes overshadowed by geopolitical risks,” said Phelix Lee, an analyst at Morningstar Inc. Those concerns have been “partially addressed” by the he recent announcement that TSMC would receive $11.6 billion in subsidies. and loans for factories in Arizona under the U.S. CHIP Act, Lee added.
The put-to-call ratio on TSMC shares declined from its March peak, suggesting there was more trading of bullish options contracts than bearish contracts, according to compiled data by Blomberg on the basis of open interests. On the sell side, 34 analysts have buy ratings on the stock with just one hold and no sells.
“We expect demand and sales growth to be higher than what is currently priced into the stock,” said Peter Garnry, head of equity strategy at Saxo Bank. “A negative of course is the growing need to de-risk its manufacturing base outside Taiwan as it increases its investment requirements, thereby reducing its free cash flow. However, these new chip manufacturing sites outside of Taiwan are necessary to continue meeting high demand.
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–With help from David Marino and Cindy Wang.
(Updates price data; adds Wednesday’s stock movement, Top Tech Stories section)
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