TSMC earnings: The heart of the chip industry - Stock Market News



Taiwan Semiconductors (TSMC) will report quarterly earnings at 06:00 GMT Thursday. The company is the world’s biggest and most advanced chip manufacturer, so its results could be crucial for the entire market amid the raging chip shortage, not just its own stock. Overall, the future for TSMC seems extremely promising, but there are a couple of risks on the radar. 

Dominance

Chip shortages have dominated the news lately and at the center of everything is TSMC, the world’s 11th largest company by market cap. The firm produces around half of the global semiconductor supply and is also the most sophisticated manufacturer, delivering the most cutting-edge chips. As such, it enjoys both a size and a technology advantage over the competition.  

To understand the business model, think of TSMC as the leading manufacturer of chips. It doesn’t design the chips, it builds them. Companies like Apple, Nvidia, and AMD design their own chips and outsource their production to TSMC. 

The pandemic turbocharged demand for everything related to chips, from computers as people worked from home to cloud services to gaming products. The main problem for TSMC is that it can’t produce quickly enough to cover all that demand. It has announced plans for a new production facility in America and is investing heavily in expanding capacity overall, but that’s a process that takes years. 

Results

For the quarter that ended in June, the company has already released its revenue numbers, which rose by 23% from the same quarter last year. As such, the market focus will be on profits. Earnings per share are expected to have risen to $0.93, which would represent a 19% increase on the year. 

Beyond the numbers, the market reaction will also depend on the guidance by management. A crucial question is whether the massive investments the company has announced will eat into its profit margins moving forward or whether it will offset the new costs by raising prices next year, as recent reports suggest. 

Taking a technical look at the stock, an earnings beat coupled with optimistic guidance could see the market test the 127.50 resistance zone initially. 

On the flipside, a disappointment might see the 122.0 region come back into play. 

Big picture

Overall, the future looks bright for TSMC. Not being able to meet demand is one of the best problems you can have as a company, and its technology lead over its chip-making competitors like Intel is massive. TSMC is essentially one generation ahead, which means it’s unlikely to lose its market dominance, especially when it invests so heavily. 

And the market is growing fast. Chips are found in every product nowadays from cars to home appliances, and several futuristic industries will require even stronger processing power. Think of artificial intelligence, data centers, cloud computing, genetic sequencing, or autonomous cars. 

Risks

Having said all this, there are two key risks. The first is valuation. It might be a great company in a growing industry without any real competition, but much of that is reflected in the price already. 

The stock is currently trading at 28.7x forward earnings and 9.9x forward sales, both of which are expensive for a mature company. This means that investors expect stellar growth moving forward, which is a double-edged sword as any piece of bad news could spark a nasty correction. 

That piece of bad news could be geopolitical. Tensions between Taiwan and China are high and rising, with Beijing being adamant that Taiwan is a rogue province and that it retains the right to use military force if needed to carry out a reunification. Military tensions in the region have escalated dramatically lately. 

While markets have ignored this so far, it is probably the biggest tail risk for TSMC. It is a low-probability but high-impact event, which makes it very difficult to price. And yet the stock doesn’t trade at a discount. 

Markets seem dazzled by the rosy growth prospects and are willing to take that chance. Even so, prudent investors should keep a close eye on the geopolitical arena. 

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