TSMC has lost the most market value in Asia since mid-June as investors brace for a prolonged period of weakness in the chip industry. This round of decline may not be over yet.Due to concerns about the macro environment and weak global consumer electronics demand, TSMC's stock price fell 11% from its June high, and its market value evaporated by US$77 billion. In recent months, volatility skew has continued to rise as traders rushed to buy bearish contracts, signaling further declines in TSMC shares.
Thanks to the global artificial intelligence (AI) craze, the world's largest chip contract manufacturer's stock price soared 60% between October last year and June this year. But traders have become cautious, skeptical about how much the AI craze will contribute to company profits, especially if the smartphone and PC business does not pick up. Even high-end AI chip orders are slowing faster than expected.
JP Morgan analysts Gokul Hariharan and others recently stated in a report that given the weakness in most end markets such as personal computers, smartphones and non-AI services, all this means that TSMC's recovery will slow down into 2024. "Given the uncertain macro outlook, we expect orders to remain subdued in the first half of 2024."
At the same time, analysts have also become cautious about TSMC's capital expenditures, given that it warned in June that capital expenditures may be at the low end of its annual guidance of US$32 billion to US$36 billion. The pooled average estimate is closer to $30 billion. While capital spending cuts are generally viewed as an aggressive and prudent cost management tool, analysts said the recent cuts signaled longer-term pessimism about chip demand and concerns about a prolonged recovery.
Goldman Sachs Group recently lowered TSMC's capital expenditure forecast for next year by more than 20% to $25 billion due to concerns that TSMC may delay its overseas capacity expansion plans. This scale will be the lowest since the beginning of the epidemic.
Data show that TSMC's 12-month profit forecast has also been revised down by about 8% from the high point in October last year, while an overall Asia-Pacific indicator was basically flat.
Part of the problem now is early optimism about TSMC's cutting-edge 3-nanometer chips. The product went into mass production last December and is seen as a technological breakthrough that could revolutionize everything from Apple's iPhone to Nvidia's AI generators.
However, this promising prospect has encountered some setbacks due to weak consumer demand. Earlier this month, TSMC reportedly told major suppliers to delay deliveries of high-end chip manufacturing equipment. JPMorgan Chase said that Nvidia, Advanced Micro Devices Inc. and Qualcomm may even delay their chip orders until 2025.
Citigroup analysts said that amid macroeconomic weakness, given that demand cannot return to pre-epidemic levels, "we do expect the recovery may take longer," Laura Chen wrote in a recent report.
Still, there are many positives for TSMC. The company's market share in the second quarter remained stable at 59%, and its leadership position in chip manufacturing remains attractive. Data from Counterpoint Technology Market Research shows that its largest competitor, Samsung Electronics, has a market share of 11%.
Analysts still have high ratings for TSMC. Bloomberg data shows that no analysts have given it a sell rating, and the 12-month average target price is 24% higher than the previous closing price. As a major foundry company for companies such as Nvidia and AMD, as long as its third-quarter financial report released next month shows surprises in its AI-related business, it may stimulate a resurgence of buying.
However, traders are likely to remain largely on the sidelines until the overall economy recovers. Mizuho Securities Asia analyst Kevin Wang said investors may become more cautious about TSMC customers' inventory adjustments taking longer than expected. "We now expect this adjustment to extend into the first quarter or even the second quarter of next year due to weak end demand," he added.