Have you read: TSMC staying bullish in bear market

The stock prices of TSMC are in freefall. On July 5th, it bottomed out at NT$433, the lowest since November of 2020. In six months, TSMC lost six trillion dollars in market value. 

Goldman Sachs has become the first foreign investment firm, also known as a “QFII”, to downgrade the price target of TSMC in recent months.

Near the end of June, Goldman Sachs lowered the 12-month price target of TSMC from NT$912 to NT$857. Its report read: “Rising inflation and the high base period of 2022 means that uncertainty in demand will still be a force to reckon with. 2023 will be full of challenges!” 

A major reason why TSMC stocks are falling is because investors are making adjustments to their stock selection strategies; many foreign and retail investors have already decided to cut their losses. 

An American QFII stock analyst points out that talks of an impending recession have made the market outlook appear more pessimistic than it really is. The Taiwanese stock market is heavily influenced by its American counterpart. “TSMC stocks comprise some of the core holdings of many foreign investment firms. Now that they are shedding TSMC stocks to cut losses, those international companies will need some time to rearrange their portfolio. We are not out of the woods yet.”   

Data from the Taiwan Stock Exchange (TWSE) shows that foreign investors have sold over 140,000 shares of TSMC stocks in June and July of this year. 

As usual, the key lies in the fundamentals. 

During TSMC’s first-quarter earnings call earlier this year, TSMC announced optimistically, for the first time, that its CAGR is expected to grow by 15% to 20% during the next few years, if tallied in U.S. dollars. The message that TSMC was trying to send was that it was faring better than the average growth of the semiconductor industry in general. 

As recently as the earnings call held on June 8th, TSMC Chief Financial Officer and Spokesperson Wendell Huang (黃仁昭) was still trying to reiterate this spin. Although he admitted that changes to smartphone and PC sales were driving down demand and raising inventory levels, Chairman Mark Liu (劉德音) also tried to put on a brave face: “Despite the fact we are readjusting our inventory, we are still very satisfied with our production capacity, so please put your minds at ease!”   

But now the QFIIs are saying that the slowdown in demand for consumer electronics is worse than expected. This, coupled with the Fed raising the interest rate and the reduced global liquidity, has led to a chain reaction that may continue to decrease TSMC’s capacity utilization rate in 2023. 

The world is waiting to see whether TSMC will decrease its revenue growth forecast for 2023 and 2024 during its next earnings call, scheduled for July 14th.

Even the Goldman Sachs report adopted a skeptical tone about TSMC’s projected revenue growth.  

In the report, analyst Bruce Lu points out that slowing demand, coupled with the fact that the first half of 2023 will likely be spent clearing inventory, means that there will be adjustments to TSMC’s 8nm and 12nm capacity utilization rate. Goldman Sachs has changed its forecast for the utilization rate of the 8nm process to 89%, down from 100%; and the 12nm process to 91%, down from 97%.

Goldman Sachs has also tweaked its prediction of TSMC’s annual revenue growth: It is now 14.2%, down from 19.3%. These numbers clearly reflect the opinion that TSMC had been overly optimistic in its earlier forecasts. 

But Goldman Sachs also says that TSMC’s 3nm manufacturing process and competitive pricing has a chance of endowing the company with a quality called “tenacity”. They look forward to hearing TSMC’s statement on how inflation will affect its HPC (high performance computing) products and other semiconductor products for the next five years.

2nm mass production may be delayed

The jury is in on the market for consumer electronics, such as personal computers, notebooks, and smartphones. Morgan Stanley has published a report based on its survey of the supply chain. They found that key TSMC customers, such as AMD and Nvidia, have already canceled part of their 5nm and 7nm orders for the second half of 2022, citing sluggish demand in the consumer electronics and gaming sectors.    

The next big worry is whether the mass production of chips based on TSMC’s sub-3nm advanced processing technology will be delayed as a result. Analyst Andrew Lu (陸行之) warns that if the mass production of TSMC’s 3nm chips is delayed, they will not be used in Apple’s newest product, to be launched in September. This will delay the mass production of the 2nm chips in turn. TSMC’s competitors will take the chance to catch up.  

Taiwanese investor representatives worry that Apple may cut costs in the face of suboptimal market demand. The M3 processor, to be launched in 2023, may not adopt TSMC’s 3nm chips. “If Apple has a change of heart due to the slowing economy, it will be bad news for TSMC!” says David Chu (儲祥生), Chairman of Hua Nan Securities Investment Management Co. 

Analysts: Wait and see for at least another six months

An analyst familiar with the semiconductor industry notes that memory giant Micron Technology has already raised the alarm. During its earnings call on June 30th, it took the initiative and reduced the forecasted growth for the DRAM and NAND market. CEO Sanjay Mehrotra not only bit the bullet and conceded that inflation and supply chain issues would likely increase costs, he also stressed that the strategy going forward will be to scale back production and focus on inventory management. Because of this, expenditures for foundry equipment in 2023 will be less than this year.

The same analyst predicts that the global recession is about to set off a chain reaction. The “adjustment period” is just starting. There will likely be more news about semiconductor companies losing orders, reducing their inventory, and scaling back their profit margin growth goals. “If the economy is in a bad way, the semiconductor industry is unlikely to make a sudden comeback.” 

The analyst says that TSMC stock prices may continue to fluctuate for multiple quarters. “Investors must ask themselves: How long will I be able to ride out the storm?” 

Have you read?

• Ensuring a stronger US-Taiwan tech supply chain partnership
• The Chinese company that worries Taiwan IC makers
• TSMC in Japan is significant for business and human rights in Taiwan

Translated by Jack Chou
Edited by TC Lin
Uploaded by Penny Chiang