Taiwan Semiconductor: Don’t Miss China’s Reopening Discount (NYSE:TSM)

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Investment thesis

TSM 5-Year Stock Price

TSM 5-Year Stock Price

Looking for Alpha

Unfortunately, we missed Taiwan Semiconductor Manufacturing Company Limited (New York stock market :TSM) to the low of $60, due to our overly aggressive price target of $50. It is obvious that his good october sales met with a lot of optimism from market analysts, triggering an impressive rally of 18.81% for TSM from the recent low. Investors need not worry, however, as the stock is still exposed to numerous geopolitical risks, significantly compounded by the uncertain US midterm elections. Through 2023, we could see more volatility as the chip war between China and the United States develops, which could lead to a moderate digestion of current optimism.

On the other hand, although one-day price movements do not reflect the eventual reversal of the market, things definitely look more promising now. The October CPI report finally indicated that the Fed’s four consecutive 75 basis point hikes were working. The S&P 500 Index recorded a remarkably bullish one-day rally, such as with TSM on November 10, 2022. Consequently, bolstering Mr. Market’s confidence that the Feds will soon pivot, with 85.4% of analysts predicting a 50 basis point hike by December, similar to the The recent moderation of the Bank of Canada.

In this scenario, we are indeed witnessing the latest bottom in the market and we could begin to look forward to a long-term recovery. Only time will tell, as TSM continues to post exemplary 10-year returns of 444.5% despite the tragic correction so far. We also hear some quiet whispers about the potential easing of China’s Zero Covid policy. With a possible rebound in consumer demand in China and a gradual decline in inflation in the US, we could see TSM recover sustainably in the near term.

Consumer demand remains intact no matter the time slump

TSM Sales October/ September/ August 2022

TSM Sales October/ September/ August 2022


TSM continues to prove that there is no demand destruction given its strong sales growth thus far. The company reported an excellent 44% year-on-year increase in year-to-date sales, while the October report showed robust demand with revenue of NT$210.26 billion, which represents growth of 1% quarter-on-quarter and 56.3% year-on-year. While these numbers may indicate a noticeable deceleration from FQ3’22 levels of 47.9% YoY growth, it is still a massive improvement from FQ3’21 levels of 16.3%, at FQ3’20 levels of 21.6% and at FQ3’19 levels of 12.6%. .

It’s natural for TSM stock to normalize from hyper-pandemic levels, due to its capital spending slowing for fiscal 2022 from the original projection of $44 billion to $36 billion. However, we must still highlight the tremendous expansion from FY2021 levels of $30.25 billion and FY2020 levels of $18.04 billion, on top of its already significant PPE net assets of 80 $.19 billion at FQ3’22 vs. $39.13 billion at FQ3’19. Moreover, part of the Investment slowdown is attributed to its pivot to 3nm technology through 2024 and vendor challenges.

The latter is not surprising, since ASML (ASML) reported massive arrears of 38 billion euros by FQ3’22, growing significantly by 200% YoY. Importantly, 85% of the backlog is attributed to advanced nodes and slice capacity expansions. Additionally, deliveries are to be staggered through 2024 due to strong demand eclipsing its existing build/shipment capacity, indicating continued growth in capital spending in an uncertain macro economy. Although the semi-supercycle and equities clearly crashed in November 2021, this pain is only temporary, as it only gives interested investors very small entry points, helped considerably by the worsening geopolitical problems. .

No matter what the bears say about the speculative invasion of Taiwan, TSM has also made considerable efforts in its geographic expansion, with the potential addition of 3nm technology in its second US factory by 2025. The potential global shutdown of major world economies worse than the COVID-19 pandemic would also make outright war highly unlikely, as the Chinese economy would suffer greatly. If an invasion were to really happen, the majority of the stock market would crash anyway, debunking the bears’ biggest concern about TSM’s stock losing value.

In the meantime, we encourage you to read our previous article, which would help you better understand its market position and opportunities.

So, is TSM Stock a buySell ​​or Keep?

TSM 10Y EV/Revenue and P/E Valuations

TSM 10Y EV/Revenue and P/E Valuations

S&P Capital IQ

TSM is trading at a Revenue EV/NTM of 4.08x and a P/E NTM of 10.60x, below its 10-year average of 5.44x and 16.57x, respectively. The stock is also trading at $70.84, down -51.14% from its 52-week high at $145.00, but with a 19.19% premium to its low. 52 weeks at $59.43. Nonetheless, consensus estimates are still bullish on TSM’s outlook, given their price target of $84.50 and a 19.28% upside from current prices.

We also expect TSM to moderately rise from the ashes, as the Chinese government shows promise in a Unexpected pivot of the Zero Covid policy, as evidenced by his reduced quarantine periods and reversal of secondary contact tracing. Assuming these easings hold through the harsh winter, chances are most Chinese ADRs will rebound, as seen with Alibaba (BABA) bullish recovery of 7.6% on November 10, 2022, JD.com (J.D.) by 8.41%, Baidu (BIDU) by 8.34%, XPeng (XPEV) by 5.55%, and NIO (NIO) by 11.78% over the same period.

In addition, the Chinese economy accounted for the majority of global chip demand, totaling 40% of world consumption the penalty $350 billion in 2020 with a 14.6% year-over-year increase. Despite the ongoing trade war in the United States and national COVID lockdowns, the country has continued to import 417.1B chip units for the first nine months of 2021, with $79.4 billion from Taiwan alone in S1’22. Therefore, we expect a strong recovery in chip demand once the Chinese economy rebounds and consumer demand returns.

Additionally, TSM remains highly relevant over the next decade with its 54.9% global market share in foundries, so investors with higher risk tolerance and longer time horizons can still nibble. at current levels. From near-unprecedented P/E valuations of 9.63x, the stock is very cheap for portfolio growth and investment over the next decade. Naturally, only suitable for those who are able to turn a blind eye to worsening geopolitical problems and the resulting short-term volatility.

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