Taiwan Semiconductor Manufacturing Co. (TSMC) is experiencing a significant decline in its stock value, surpassing any other in Asia since mid-June. This trend is indicative of investors preparing for an extended period of weakness in the semiconductor sector. Experts suggest that the downturn may not have reached its nadir.
Since reaching its zenith in June, shares of TSMC, based in Taiwan, have plummeted by 11%, resulting in a loss of $77 billion from its market capitalization. This decline is attributed to concerns regarding the global macroeconomic landscape and a decrease in demand for consumer electronics worldwide. The escalating volatility skew, a measure of options market sentiment, in recent months, suggests a further descent in TSMC’s stock prices.
While TSMC, the world’s largest contract chip manufacturer, enjoyed a 60% surge in shares between October of the preceding year and June, primarily due to the global fervor surrounding artificial intelligence, traders have grown apprehensive about its direct impact on the company’s bottom line. This apprehension has been exacerbated by a sluggishness in the smartphone and personal-computer markets, even affecting high-end AI chip orders at a more rapid pace than anticipated.
Analysts from JPMorgan Chase & Co. anticipate a protracted recovery for TSMC heading into 2024, given the softness observed in crucial end markets like PCs, smartphones, and non-AI services. Gokul Hariharan, among others, noted in a recent analysis, “With a murky macro outlook, we expect 1H 24 orders to remain sluggish.”
Simultaneously, concerns about capital spending have begun to surface, with TSMC issuing a caution in June that expenditure levels may dwindle towards the lower end of its projected range of $32 to $36 billion for the year. Bloomberg-compiled estimates average closer to $30 billion. While reductions in capital expenditure are typically viewed as prudent cost management strategies, analysts interpret these recent cuts as a harbinger of a longer-term downtrend in chip demand and a lingering recovery.
Goldman Sachs Group Inc. has recently downsized its projections for TSMC’s capital spending next year by over 20%, forecasting $25 billion, citing concerns that the chipmaker may delay its planned expansion of overseas production capabilities. If realized, this would mark the smallest capital spending since the onset of the pandemic.
Bloomberg data indicates an 8% reduction in the 12-month earnings estimate for TSMC since its pinnacle in October of the preceding year, in stark contrast to marginal shifts in a wider spectrum of Asia Pacific stocks.
A pivotal factor in this scenario is the earlier exuberance surrounding TSMC’s cutting-edge 3-nanometer chip. Initially hailed as a technological milestone with potential applications in Apple Inc.’s iPhones and Nvidia Corp.’s AI generators, this endeavor has encountered headwinds due to tepid consumer demand. Reports indicate TSMC communicated delays to key suppliers earlier this month. JPMorgan further speculates that Nvidia, Advanced Micro Devices Inc., and Qualcomm Inc. may defer their chip orders until 2025.
Despite these challenges, TSMC maintains a dominant position in the foundry market, boasting a steady 59% market share in the second quarter. This sharply contrasts with its primary competitor, Samsung Electronics Co., which commands an 11% share, as per Counterpoint Technology Market Research.
Moreover, TSMC continues to enjoy a favorable rating from analysts. Bloomberg data reveals no sell ratings and an average 12-month price target that stands 24% above its most recent closing figure. The company’s role as a pivotal foundry for industry giants like Nvidia and AMD may spur renewed investor interest should there be an unexpected upturn in its AI-related business during third-quarter earnings, set to be announced next month.
Nevertheless, traders may exercise caution until a more comprehensive economic rebound is evident. Mizuho Securities Asia Ltd. analyst Kevin Wang suggests investors may adopt a wait-and-see approach, citing potential prolonged inventory adjustments at TSMC’s clientele well into the first or even second quarter of the upcoming year, given the subdued end-demand.
In conclusion, the precipitous decline in the stock value of TSMC underscores the persistent challenges facing the semiconductor industry, prompting a cautious outlook among investors and analysts alike.