Analysts Remain Optimistic about a Recovery in Semiconductor Chip Demand

Analysts remain bullish on Taiwan Semiconductor Manufacturing Co (TSM) despite its report last week of disappointing sales estimates.  TSM is the world’s biggest contract manufacturer of chips and exclusive supplier of Apple’s (AAPL) Silicon chips for its iPhones and Macs.  According to Bloomberg data, 39 out of 40 analysts who cover the stock have a buy or an equivalent recommendation on the company, the highest proportion in at least twenty years.

Over the past year, the slump in chip demand has led to a jump in inventories that prompted chip companies to cut production and capital spending plans.  However, Abrdn Asia Limited said, “We are likely closer to the bottom for the industry.  The longer-term structural growth drivers remain intact, and in fact, with higher demands for computing power amid growing applications for AI, etc., we can argue that the picture looks stronger.”

Many analysts are projecting a recovery in chip demand in the second half of this year.  Allianz Global Investors sees a bottom for chip sales in the second quarter, and Picket Asset Management forecasts an earnings trough during the first half of this year.  Also, JPMorgan Chase said that while it sees downside for TSMC this year, they expect the focus to shift toward a potential 2024 rebound “in the near to medium term.”  TSMC will report Q1 earnings on Thursday.

TSMC’s valuations are below average, another positive factor for the stock.  TSMC shares are trading at about 14.8 times estimated earnings, well below its five-year average of 21 times.  Another supportive factor for the stock is the company’s strong position in artificial intelligence.  TSMC forges chips for Nvidia (NVDA), which makes semiconductors that are used to train and refine AI systems.  Earlier this year, Nvidia offered a bullish outlook for the three months ending in April, due partly to its AI applications.

Despite all the bullish euphoria for TSMC, there are some reasons for concern.  Geopolitical tensions between China and Taiwan remain high, which Warren Buffet cited for his decision to cut his stake in TSMC by 86% in Q4.  China continues to make threatening moves towards Taiwan, which could eventually involve sealing off the island or a full invasion to enforce its territorial claims to the island.

Also, there are concerns about a cut in guidance after TSMC announced last week “very weak” March monthly sales. However, Union Bancaire Privee said, “longer term, we think there should be no argument about high structural demand that can support TSMC’s growth.”

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.