Taiwan Semiconductor: Imploding Demand From Key Customers — $150B Gen-AI To The Rescue

Jul. 23, 2023 12:00 PM ET Taiwan Semiconductor Manufacturing Company Limited (TSM)

Summary

• Unsurprisingly, TSM reports impacted top and bottom lines in FQ2'23, thanks to the pulled-forward growth from the hyper-pandemic period and ongoing inventory correction.
• This cadence may suggest that the foundry’s key customers, such as AAPL, AMD, and INTC, are experiencing implosions of demand.
• The only bright spot may be NVDA, attributed to its astounding forward guidance from the robust Generative AI demand, temporarily absorbing TSM’s excess capacity through its high-end GPUs.
• While we believe that the foundry may successfully execute in Arizona, its bottom line may also be impacted due to the tremendous gap in costs and work culture.
• While TSM is a Buy with a long-term PT of $147, investors must also keep abreast of the developing Chips War, despite the Generative AI’s TAM of $150B by 2028.

Introduction

Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest contract chipmaker. The company provides wafer fabrication services to a wide range of customers, including Apple, Huawei, and Qualcomm.

In recent weeks, TSMC’s stock has been on a downward spiral. The stock is down over 20% from its highs in January 2022.

There are a number of factors that are likely contributing to the sell-off in TSMC stock. These factors include:

• Concerns about demand from key customers.
• Increasing competition from Chinese chipmakers.
• The broader sell-off in the tech sector.

Concerns About Demand From Key Customers

One of the biggest concerns for TSMC investors is the demand from key customers. Apple and Huawei are two of TSMC’s largest customers. However, both companies are facing headwinds.

Apple is facing slowing demand for its iPhones. The company is also facing increasing competition from Chinese smartphone makers.

Huawei is facing sanctions from the United States government. These sanctions have made it difficult for Huawei to get the components it needs to make its smartphones.

Increasing Competition From Chinese Chipmakers

Another concern for TSMC investors is the increasing competition from Chinese chipmakers. China is investing heavily in its semiconductor industry. This is leading to the emergence of new Chinese chipmakers that are challenging TSMC’s dominance.

The Broader Sell-Off In The Tech Sector

The sell-off in TSMC stock is also being driven by the broader sell-off in the tech sector. The tech sector has been under pressure in recent months due to concerns about rising interest rates and inflation.

The Future of TSMC

Despite the recent sell-off, I believe that TSMC is a good investment for long-term investors. The company is a leader in the semiconductor industry, and it is well-positioned to benefit from the growth of the industry in the years to come.

TSMC has a strong track record of innovation. The company is constantly investing in new technologies, such as 5G and artificial intelligence. This gives TSMC a competitive advantage in the long term.

TSMC also has a large customer base. This gives the company some insulation from the cyclicality of the semiconductor industry.

Conclusion

I believe that the sell-off in TSMC stock is an opportunity to buy the stock. The company is a high-quality company with a bright future. I believe that TSMC will be a leader in the semiconductor industry for many years to come.

Additional Information

• TSMC’s market capitalization is over \$500 billion.
• The company’s revenue in 2021 was \$55.3 billion.
• TSMC’s net income in 2021 was \$23.2 billion.
• The company’s return on equity is 30%.

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