Taiwan Semiconductor Manufacturing Co's (TSM.N) $420 billion share price rally this year will face a valuation test when it reports earnings next week, with analysts expecting the chip maker to raise its full-year sales forecast.
The world’s largest contract chipmaker is likely to report a 29 percent rise in second-quarter net revenue on Thursday, according to the median estimate of analysts surveyed by Bloomberg. What’s more, analysts including JPMorgan Chase & Co. and Morgan Stanley expect the company to also raise its full-year sales guidance, justifying a new round of valuation expansion.
Like Nvidia Corp. (NVDA.O), TSMC has become a favorite AI bet among investors, with few other rivals able to replicate its cutting-edge technology. As demand grows, TSMC has bargaining power to raise prices for advanced chips. Analysts have been playing catch-up on its valuations and price targets as the company surged to $1 trillion in U.S. market value earlier this week.
“Investors realize that TSMC is the pick and shovel play for the AI theme,” said JianShi Cortesi, a portfolio manager at Gam Investment Management, whose largest fund counts TSMC stock as its top holding. “In my opinion, AI demand can be sustained for at least the next few quarters as there is no sign of a slowdown in demand for AI chips.”
The sole supplier of the most advanced chips to Nvidia Corp and Apple Inc had previously forecast full-year revenue growth of around 20 percent, but that outlook is increasingly seen as too cautious, especially after its June sales outperformed those of Samsung Electronics Co and major customer Broadcom Inc AVGO.O.
Helping to lift investor expectations was TSMC’s announcement on Wednesday that second-quarter sales rose 40%, compared with an average forecast for a 36% increase.
At the start of the year, TSMC was valued at 13 times its 2025 price-to-earnings forecast. In six months, that number has jumped to 21 times. Analysts say evidence that TSMC's profit margins are improving will further lift that valuation.
"The acceleration of earnings growth should drive a re-rating of valuations," said Kevin Wang, an analyst at Mizuho Securities. "Margin improvement could drive earnings growth of 25%, or even 30%, so valuations could also expand to at least 25 times."
Investors will be carefully studying TSMC’s tone on the earnings call for further clues about the chip market recovery and trends in demand for artificial intelligence, which is helping to make up for sluggish smartphone sales, which are only just recovering from a slump.
A recovery in demand for high-end smartphones and product upgrades in high-performance computing could lead to higher prices for more advanced semiconductors. JPMorgan estimates TSMC could raise prices by 3% to 6% for different customers of its most advanced chips.
“With over 50% of revenues set to see mid-single-digit price increases, this will also deliver over 100bps of gross margin expansion by 2025,” JPMorgan analysts including Gokul Hariharan wrote in a July 7 note, predicting TSMC’s gross margin will jump to 58% next year, above consensus estimates.
Still, there are signs that some are uneasy about its valuation. Foreign investors were net sellers of TSMC shares for five straight sessions through Thursday, according to data from the Taiwan Stock Exchange.
Its market value now far exceeds the combined market capitalization of all Latin American companies in MSCI Inc.’s emerging-markets benchmark, which is tracked by multimillion-dollar funds around the world, according to Bloomberg calculations.
“Right now, everything in the AI supply chain is in short supply,” said Robert Cheng, an analyst at Bank of America. “TSMC’s stock valuation is not high. The stock price has risen a lot, but they are backed by earnings.”
Article forwarded from: Jinshi Data
