TSMC capex outlook key to next phase of US$330bil stock rally

TSMC is seen as a prime beneficiary of the AI boom. — Bloomberg

TAIPEI: With Taiwan Semiconductor Manufacturing Co (TSMC) still trading at pedestrian valuations even after surging to a record high, there is potential for its upcoming results to drive the stock even higher.

Some market observers see a possibility that the world’s largest chip foundry will raise its revenue and capital expenditure (capex) forecasts for the year following its better-than-expected sales for the latest quarter.

This would provide evidence that the strong growth fuelled by artificial intelligence (AI) will be sustained.

As the key maker of chips designed by Nvidia Corp and others, TSMC is seen as a prime beneficiary of the AI boom.

While the current outlook for smartphones and other consumer products remains cloudy, the industry’s continual upgrades to ever-finer circuitry are another positive.

“The top thing to watch is the capex expectations, given that tends to be an indication of the demand it is seeing,” said Xin-Yao Ng, director of investment at abrdn.

“We still think TSMC is worth buying because the share price gains are backed by fundamentals, where its dominance and technological leadership in the most advanced chip nodes leave it very well placed to compound earnings at high rates for longer.”

TSMC’s shares have more than doubled from an October 2022 low, adding US$330bil to the market capitalisation of Asia’s largest stock.

Yet it’s trading slightly below its five-year median valuation at 16 times expected earnings for next year.

That compares with more than 28 times for the Philadelphia Semiconductor Index, a 15-year high.

The Taiwanese chipmaker will provide its full first-quarter results today, shedding light on the sales contributions of various businesses and how profitability has held up as it spends on overseas expansion.

Analysts estimate TSMC’s gross profit margin held at 53%, the same level as the previous quarter.

TSMC is currently budgeting capex of US$28bil to US$32bil for the full year and expects its revenue to grow at least 20%, reversing 2023’s slight decline.

The consensus analyst estimate is for US$29bil.

The company has projects underway to build plants in the United States, Japan and Germany as it moves to serve global demand and diversify its geographical footprint amid tensions between China and the West.

“TSMC is undervalued as the firm’s dominant position in cutting-edge chips is sometimes overshadowed by geopolitical risks,” said Phelix Lee, an analyst at Morningstar Inc.

These concerns were “partially addressed” by recent news that TSMC is receiving US$11.6bil in grants and loans for factories in Arizona under the US Chips Act, Lee added.

The put-to-call ratio on TSMC’s Taipei-listed shares has declined from a March high, suggesting there has been more trading in bullish options contracts than bearish ones, according to Blomberg-compiled data based on open interest.

On the sell-side, 34 analysts have “buy” ratings on the stock with one “hold” and no “sells”.

“We expect demand and sales growth to be higher for longer 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 out of Taiwan as it increases its capex needs, lowering free cash flows.

“However, these new chip manufacturing sites outside Taiwan are needed to keep servicing the high demand.” — Bloomberg

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