TSMC's Capital Spending Outlook Key to Next Leg of $330 Billion Stock Rally

(Bloomberg) - Taiwan Semiconductor Manufacturing Co.

More reads from Bloomberg.

• Dubai brought to a standstill as clouds of rain worsen flooding

• MARKET ROUNDUP: U.S. Yields Soar as Powell's Hawkish Approach Makes 5% Rate Possible

• China Tells Iran to Keep Carrying on After Israel Attacks

• What if the Fed's rate hike really triggered a boom in the U.S. economy?

• Powell signals delay in rate cuts: inflation surprise after inflation surprise

Some market observers believe the world's largest chip foundry is likely to raise its revenue and capital spending forecasts for this year after better-than-expected sales in the most recent quarter. That would be evidence that the strong growth driven by artificial intelligence is here to stay.

As a major maker of chips designed by Nvidia Corp. and others, TSMC has been recognized as a major beneficiary of the artificial intelligence boom. While the outlook for smartphones and other consumer products remains uncertain, the industry's continued upgrading to more sophisticated circuits is another positive factor.

"The most interesting thing to look at is capex expectations, as that is often an indicator of the demand they see," said Xin-Yao Ng, director of investment and agriculture at abrdn." We still think TSMC is worth buying as the share price rally is backed by the fundamentals, their dominant position in the most advanced chip nodes and technology leadership, which puts them in a good position to realize high compounded郃 yields over a longer period of time.

Read More Riding the AI chip boom, TSMC sales rise the most since 2022

TSMC's share price has more than doubled from its October 2022 low, adding $330 billion to the market capitalization of Asia's largest stock. However, the company is trading at 16 times next year's expected earnings, slightly below its five-year median valuation. By comparison, the Philadelphia semiconductor index trades above 28 times, a 15-year high.

The Taiwanese chip maker will release its first-quarter results on Thursday, when it will announce sales contributions from each business, as well as the maintenance of profitability while expanding overseas. Analysts estimate TSMC's gross margin at 53%, unchanged from the previous quarter.

TSMC's current full-year capex budget is $28B-$32B, and it expects revenue to grow at least 20%, reversing a slight decline in 2023. The analyst consensus estimate is $29 billion.

The company is embarking on projects in the United States, Japan and Germany to meet global demand and to diversify geographically in the context of tensions between China and the West.

"These concerns were "partially allayed" by the recent news from Morningstar Inc. that TSMC's Arizona plant would receive $11.6 billion in grants and loans under the U.S. Chip Act.

According to data compiled by Blomberg based on open positions, the ratio of puts to calls on TSMC's Taipei-listed shares has declined from a high in March, suggesting that more calls than puts are being traded. On the sell side, 34 analysts have rated the stock with a buy rating, 1 hold and no sells.

"We expect demand and sales growth to persist above the current share price," said Peter Garnry, head of equity strategy at Saxo Bank." One downside, however, is that the company increasingly needs to shift its manufacturing base away from Taiwan as capital spending needs increase, reducing free cash flow. However, these new chip production facilities outside of Taiwan are necessary to meet the high demand."

-Written with the help of David Marino and Cindy Wang.

Most Read by Bloomberg Businessweek

• Global Economic Recovery Masks Worsening Debt and Inequality

• Cities use artificial intelligence to help ambulances and fire trucks get to their destinations faster

• Shadow Swift's Economy with Pirated Bangles and $1,150 Jumpsuits

• A very bad week for Tesla, its employees, and even Elon Maas resonance

• Key Takeaways from Business Week's Teen Pornography Extortion Investigation

Copyright ©2024 Bloomberg Intelligence.