TSMC Bulls Expect Strong Results to Support Record-High Shares

(Bloomberg) -- The rebound in shares of Taiwan Semiconductor Manufacturing Co. to a fresh record faces a key test with its earnings report Thursday, after ASML Holding NV’s surprisingly weak forecast spooked chip investors.

Eased concern over Nvidia Corp.’s newest artificial intelligence product and optimism over Apple Inc.’s iPhone have renewed enthusiasm for their chip manufacturer TSMC. That has driven its US-listed shares up 30% from an August trough to touch a new peak.

The stock could get another lift from robust guidance following the company’s AI-driven preliminary sales beat for the latest quarter, market watchers say. Its comments on demand will be closely parsed, particularly after ASML’s cut on outlook in areas beyond AI sparked a slide in global chip stocks.

Strong guidance and potential comments on 2025 demand “will probably push the stock higher,” said Kevin Net, head of Asian equities at Financiere de L Echiquier. The company’s capital spending likely “will end up at the top end of the guidance range at around $32 billion,” indicating a strong outlook.

The stakes have risen after investors fled AI stocks just a few months ago on concerns that the technology will fail to deliver on the market’s inflated profit expectations. The forward earnings per share estimate for TSMC has climbed 37% this year to an all-time high.

Details of the chipmaker’s third-quarter results are expected to show profitability is indeed improving, with analysts targeting a gross margin of 54.8%, the highest in six quarters. 

The company’s full-year forecasts will be in particular focus after it lifted its sales growth target following results in July. The ramp-up for Nvida’s Blackwell chips and progress on expansion of TSMC’s advanced packaging capacity are among other key points to watch, according to Gary Tan, a portfolio manager at Allspring Global Investments.

While the weak outlook from ASML spurred renewed concerns over the broader industry, TSMC is seen as more resilient than its key equipment supplier. Its longer-term outlook, which hinges on demand for the high-end chips used to train and host AI models, should remain intact, analysts say. 

“AI continues to be the driver to TSMC’s fundamentals and valuation,” Nomura Holdings Inc. analysts including Aaron Jeng wrote in a note last week. Any downside from non-AI business is limited “given already prudent supply chain builds, and thus we anticipate a more significant cyclical rebound into 2025.”

Beyond fundamentals, some market watchers caution on geopolitical concerns heading into the US election. TSMC is spending tens of billions of dollars to set up new production sites in the US, Japan and Germany, partly to hedge against tensions between Taiwan and China.

“The Taiwan geopolitical risk premium could go up” if Donald Trump is elected, Net said. “On the other hand, TSMC has done a lot in terms of reshoring, and they will probably give more of an update this week.”

The consensus price target calls for a 16% rise on TSMC’s US shares over the next 12 months. Valuations are seen as undemanding, with the stock trading at 23 times forward earnings estimates compared with a peak of 34 times in 2021.

--With assistance from Cindy Wang, Jane Lanhee Lee and Edwin Chan.

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