TSMC’s U.S. stock rallies as Wall Street talks about bottom in the chip sector

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U.S. shares of Taiwan Semiconductor Manufacturing Co. rallied Thursday after the third-party silicon-wafer fabricator’s results once again brought up the inevitable speculation about “the bottom” — and that it may come a quarter later than expected.

American depositary receipts of TSMC rallied as much as 8.6% to an intraday high of $88.83 and were last up 7.6%, compared with a 0.5% gain on the S&P 500 a 0.6% gain on the Nasdaq and a 1.5% gain on the PHLX Semiconductor Index Earlier in the day, TSMC warned of revenue headwinds and lower margins, which one analyst earlier had forecast as a tailwind for the company.

Before earnings, Needham analyst Charles Shi had said the bigger the cut to TSMC’s full-year guidance, the better shape things will be in for 2024, indicating a bottoming out in the first half of the year. In a Thursday note, Shi called it “the most anticipated earnings call of this downcycle.”

Shi said that TSMC expects slower growth than he expected, implying a bottom in the second quarter, rather than the first quarter as he had forecast. The company’s capital-expenditure reduction to between $32 billion and $36 billion was in line with his estimates, and while a narrowing profit margin was not a surprise, a 20% hike to R&D expenses was.

“The key questions are: 1) Can you trust TSMC’s call for a [second quarter 2023] bottom? 2) If TSMC’s guidance can be trusted (we think so), do investors want to buy the last cut ([first quarter 2023] print in April), or maybe now is the time to buy,” Shi wrote.

TSMC forecast first-quarter revenue of $16.7 billion to $17.5 billion and gross margins between 53.5% and 55.5%, slimmer than the fourth quarter’s 62.2%. Analysts surveyed by FactSet expect $17.39 billion.

Citi Research analyst Laura Chen, who has a buy rating, said that even though TSMC sees PC and smartphone weakness and potential weakness in the data-center market, it still commands a strong position.

“Thanks to its share gain and content increase, we believe the company would continue to outperform the overall semiconductor market,” which she said TSMC expects to be down 3% year over year in estimates for 2023. “On the back of uncertain macro demand, we are waiting for better recovery in [estimates for 2024].”

Of the 39 analysts who cover TSMC, 35 have buy-grade ratings and four have hold ratings, along with an average target price of $145.64, according to FactSet data.

TSMC supplies chip makers that do not have their own fabs, like Nvidia Corp.   Advanced Micro Devices Inc.  and Apple Inc. 

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