TAIPEI – Shares of Taiwan Semiconductor Manufacturing Company (TSMC) have lost more value than any other stock in Asia since mid-June as investors brace themselves for prolonged weakness in the chip sector.
The rout may not be over.
Since their June high, TSMC shares have fallen 10 per cent, erasing US$72 billion (S$99 billion) from its market cap due to worries about the macro environment and soft global consumer electronics demand.
A continued rise in the volatility skew in recent months as traders bid up bearish contracts is indicating a further drop in TSMC’s stock.
Shares of the world’s largest contract chipmaker jumped 60 per cent between October and June, thanks to the global frenzy over everything related to artificial intelligence (AI).
But traders have turned more wary about just how much that will contribute to the bottom line, especially without a pickup in the smartphone and personal computer business.
Even high-end AI chip orders have slowed at a faster pace than expected.
For JPMorgan Chase, all this means a slower recovery for TSMC going into 2024, given the softness in most end markets like PCs, smartphones and non-AI services, its analysts wrote in a recent note. “With a murky macro outlook, we expect (first-half 2024) orders to remain sluggish.”
Meanwhile, analysts are also turning wary about capital spending, given that TSMC in June warned that levels may fall to the bottom end of its US$32 billion to US$36 billion guidance for the year.
While capital expenditure cuts are commonly seen as a positive and prudent cost management tool, analysts say the recent reductions signal longer-term bearishness about chip demand and concerns about a protracted recovery.
Goldman Sachs Group recently slashed its estimate for TSMC’s capital spending for 2024 by more than 20 per cent to US$25 billion over concerns that the chipmaker may delay its planned overseas capacity expansion.
That would be its smallest amount of spending since the beginning of the pandemic.
The 12-month earnings estimate for TSMC has also been revised down by about 8 per cent from a high in October, according to Bloomberg data, compared with little change in a broader gauge of Asia-Pacific stocks.
Part of the issue at hand is the earlier pent-up optimism over TSMC’s cutting-edge 3-nanometre chip.
The product, which was put into mass production in December, was seen as a breakthrough that would revolutionise everything from Apple’s iPhones to Nvidia’s AI generators.
But that promise has encountered some setbacks due to weak consumer demand.
Earlier in September, TSMC reportedly told major suppliers it had to delay deliveries.
Nvidia, AMD and Qualcomm may even delay their orders for the chips until 2025, according to JPMorgan.
There are still a number of positives for TSMC, however.
Its leadership position in the foundry – or chip manufacturing – market, with a stable share of 59 per cent in the second quarter, continues to make the company attractive. This is compared with an 11 per cent share for its biggest rival Samsung Electronics, according to Counterpoint Technology Market Research.
TSMC is also highly rated by analysts, with Bloomberg data showing no sell ratings and a 12-month average price target that is 24 per cent above its last close.
As a key foundry for the likes of Nvidia and AMD, any upside surprise in its AI-related business in third-quarter earnings in October may also spur renewed buying.
Still, until there is a broader economic recovery, traders may largely stay on the sidelines.
Investors may become more cautious on longer-than-expected inventory adjustments at TSMC’s customers, according to Mizuho Securities Asia analyst Kevin Wang.
“We now expect such adjustment to extend into the first quarter of next year, or even the second quarter, due to soft end-demand,” he said. BLOOMBERG
