Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s first and largest dedicated semiconductor foundry. It commands a 28% market share in the global semiconductor market, with the next largest company at just 13%. 

Semiconductor chips are the most critical component in the electronics industry. Global tech companies such as Apple, Intel, and Nvidia are heavily dependent on TSMC for their chip supply. In fact, TSMC derives 25% of its revenues from Apple.

Earnings preview

TSMC is expected to announce its earnings on 15th July. As per Bloomberg, the analyst consensus is that the firm will report $13.3 billion in revenues vs. $12.9 billion in the previous quarter. The EPS, though, is expected to fall to $0.187 vs. $0.192 last quarter.

The company’s announced sales so far already stand at the top end of the company’s guidance. This indicates a higher than expected demand for TSMC’s 5nm and 6nm nodes. This seems to have outweighed the losses from seasonally weak Apple chip demand and disruptions caused by the Covid-19 outbreak in May. It is also expected to guide for faster revenue growth. This is primarily because of the strong demand for its 5nm chips used in high-performance computing processors.

There has also been an acute shortage of chips in the automobiles industry. Clearly, this indicates that demand has been far outstripping supply. TSMC has already been ramping up its capacity for manufacturing chips used in automobiles. It expects a 60% rise in output of these chips vs. last year.

Capex and capacity addition

Moreover, TSMC has been unable to capture the chip demand fully. As discussed above, TSMC is still ramping up its capacity to create adequate supply in the market. To add new capacity, TSMC needs to allocate a significant amount for capital expenditure. 

In Q1 results, TSMC had announced Capex of a record $28 billion for the current year. This was a significant increase from the previous year’s budget of $17 billion. Investors will carefully watch if there is any revision to the Capex number and what amount has already been utilized till the June quarter.

On the demand side, Apple and Intel recently announced their testing of TSMC’s 3nm chips. So while TSMC is already increasing the capacity for its existing 5nm and 6nm chips, it will also be looking to make room for the new ones requiring additional Capex.

Price dynamics

TSMC is listed on the Taiwan bourses with the symbol 2330.TW. The company is also listed on the NYSE with the symbol TSM in the form of a depository receipt. It has a market capitalization of $560 billion, making it the largest Taiwanese company. Given the size, the stock is less volatile as compared to other listed names.

Despite posting resilient earnings, TSMC’s stock price has posted only modest gains this year so far. The stock is up 13% YTD, as compared to 19% YTD gains for the Philadelphia Semiconductor Index, which is the benchmark index for all major semiconductor stocks. It has also underperformed NASDAQ, which has gained 16% YTD. NASDAQ is a tech-heavy index and hence a good benchmark to compare TSMC with.

This underperformance has been largely driven by the fact that much of TSMC’s stellar earnings were already priced in by the market. If you look at the price chart below, the stock had a gigantic run-up started from November till mid-February. The stock price of the ADR moved up from $85 to $142 in this three-and-a-half-month period yielding a return of 67%.

Taiwan Semiconductor Manufacturing Company (TSMC) chart

This meant that much of the earnings growth in the subsequent quarters was getting captured in the price leaving little room for further growth. However, with nearly six months of underperformance, TSMC might be getting ready for the breakout as it is already trading near the resistance level around $120. The strong earnings can be a catalyst for the stock to catch up with the benchmark indices.