As chip companies continue to jockey for position in the AI boom, Taiwan Semiconductor (NYSE: TSM) is getting shunned despite handily beating Wall Street’s earnings estimates today.
TSM shares have sunk over 5% in early trading to the low $130 area, a far cry from a high of nearly $150 a week ago. With a market cap of $684.4 billion, Taiwan Semi holds many titles, including Asia’s largest publicly traded company and the world’s biggest chip maker. But today’s weakness in the stock is a reminder of how difficult it can be to win over finicky investors in a market that remains vulnerable to surprises, including the slightest of warnings about the outlook.
As a contract chipmaker, Taiwan Semi makes wafers for other companies and is AI phenomenon Nvidia’s (Nasdaq: NVDA) largest producer. As a result, Taiwan Semi is uniquely positioned to ride the AI wave from multiple sides. Investors are not giving the company a free pass of late amid a stubborn interest rate environment that has placed the chip sector into correction territory. But it could be just a blip, as TSM, which has a dividend yield of 1.5%, has returned roughly 30% year-to-date.
Top and Bottom Lines
By all counts, Taiwan Semi had a blockbuster first quarter thanks largely to AI. The company’s Q1 revenue came in at $18.87 billion, a 13% year-over-year jump owing to robust demand for memory semiconductors used in advanced chip-set applications. Taiwan Semi, which in addition to Nvidia counts Intel (Nasdaq: INTC) and Apple (Nasdaq: AAPL) among its customers, also beat on the bottom line, reporting EPS of $1.38 vs. Wall Street estimates of $1.32.
But what had investors spooked was the company’s guidance after management lowered its global chip market guidance amid a slower-than-anticipated recovery from last year’s inventory surplus. In its outlook, which excludes memory chips, the company revealed it now expects the semiconductor market to expand at a rate of 10%, with management pointing to “macroeconomic and geopolitical uncertainty” and saying that it could pressure “consumer sentiment and end-market demand.”
‘Insatiable’ AI Demand
But the AI frenzy is far from over, as Taiwan Semi forecasts Q2 revenue of between $19.6 billion and $20.4 billion, representing 20% growth amid what CEO C.C. Wei described as “insatiable AI-related demand for energy-efficient computing power.” The company is benefiting from tailwinds around the shift from traditional to AI-powered servers, a shift Wei noted was “favorable.” For Q2, Taiwan Semi forecasts revenue from AI-driven servers will more than double year-over-year to represent a low-teen percentage of overall sales.
Is Taiwan Semi a Sell in 2024?
If Wall Street analyst views are any indication, Taiwan Semiconductor’s stock has more runway for gains. Needham analyst Charles Shi recently raised his price target on TSM shares from $133 to $168 with a buy rating, suggesting 25% upside potential.
Last month, JPMorgan reiterated its overweight rating on the stock. However, Lynx Equity Strategies in a call on Taiwan Semi issued a warning on the chip sector, saying stocks have not yet bottomed. While Taiwan Semi and its peers might be taking a step backwards today, quarterly results suggest there’s plenty more to come in this AI revolution.
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