Taiwan Semiconductor Q2 Earnings: Consider Buying The Dip (NYSE:TSM)

Taiwan Semiconductor Manufacturing Firm Restricted (NYSE:TSM) (“TSMC”) reported its Q2 2023 earnings at the moment (July 20, 2023). The corporate’s revenues have been consistent with its earlier steering, and it barely beat steering on margins. Regardless of these constructive outcomes, the market has reacted poorly to the information, with TSMC’s shares opening down about 5%.

Nonetheless, I imagine that the long-term story for TSMC continues to look constructive. As such, the present decline in share worth appears to be like like a shopping for alternative to select up shares in an important firm at a really cheap worth.

Earnings and Steering

TSMC reported the next outcomes for Q2 2023:

Income: $15.68 billion (prior steering was $15.2-16.0 billion)

Gross margin: 54.1% (prior steering was 52%-54%)

Working margin: 42.0% (prior steering was $39.5%-41.5%).

For Q3 2023, TSMC supplied the next steering:

Income: $16.7-17.5 billion

Gross margin: 51.5%-53.5%

Working margin: 38%-40%.

As readers can see, TSMC’s outcomes have been consistent with steering for the highest line and beat barely on margins. The corporate additionally guided prime line development in Q3, albeit with deflated margins.

The Lengthy-Time period Story Stays Optimistic

Regardless of the semiconductor stoop persevering with to have an effect on earnings, TSMC’s steering is basically constructive. Revenues are guided to be enhance by 6.5% to 11.6% sequentially, which is a constructive signal for a restoration within the chip trade over the approaching quarters.

Utilization can be anticipated to extend, which ought to assist margins. Nonetheless, the impact will likely be greater than offset by the continuing ramp in N3 manufacturing. CFO Wendell Huang said on the earnings name:

We now have simply guided our third quarter gross margin to say no by 1.6 share factors to 52.5% on the midpoint, primarily as the upper degree of capability utilization charge is offset by 2 to three share factors margin dilution from the preliminary ramp-up of our 3-nanometer know-how.

Subsequently, income and margins appear poised for enchancment in coming quarters, although the ramp of N3 will result in general margin declines for Q3 and This fall. It is a momentary margin headwind that ought to go quickly sufficient.

The AI Enhance Is Coming

Within the meantime, TSMC additionally famous that demand for AI chips is robust. CEO C. C. Wei said:

Whereas we’ve just lately noticed a rise in AI-related demand, it isn’t sufficient to offset the general cyclicality of our enterprise.

Furthermore, TSMC is now forecasting extraordinarily robust development in demand for AI chips over the subsequent a number of years. Wei said:

Right now, server AI processor demand, which we outline as CPUs, GPUs and AI accelerators which might be performing coaching and inference capabilities accounts for roughly 6% of TSMC’s whole income. We forecasted this to develop at near 50% CAGR within the subsequent 5 years and enhance to low teenagers p.c of our income.

This development is nicely in extra of TSMC’s long-term company income development goal of 15-20%, and so represents materials upside for TSMC.

Curiously, TSMC’s forecast additionally aligns with Superior Micro Units, Inc. (AMD) CEO Lisa Su’s projection of a 50% CAGR development charge in AI accelerator whole addressable market (“TAM”) over the subsequent 5 years. Readers can see my detailed evaluation of AMD’s projection right here.

The TSMC Valuation Stays Enticing

Given the continuing stoop in semiconductors, TSMC continues to commerce at a really enticing a number of. Even this quarter, which can symbolize the worst of the stoop for TSMC (which expects semis to start out rebounding in Q3), the corporate has posted EPS of $1.14. This comes out to an annualized $4.56, which implies that TSMC is buying and selling at 22x the present run charge.

However let’s not overlook that, in 2022, TSMC posted EPS of $6.56. It’s buying and selling at solely 15x that. Furthermore, analysts at the moment count on TSMC to submit EPS of $5.75 in 2024 and $7.65 in 2025. Because of this TSMC at the moment trades at 17x 2024 earnings and a mere 13x 2025 earnings.

At these low multiples, TSMC appears to be like like an important worth for long-term buyers who can wait out the present cycle. And the valuation is especially enticing contemplating TSMC’s publicity to the AI sector and the potential for materials upside there.

Conclusion

The continuing stoop in semiconductor gross sales is disheartening, however it is going to ultimately finish. TSMC continues to climate the cruel situations nicely, and ultimately the long-term development story ought to win out over short-term cycles and volatility. Buyers who’re affected person and permit TSMC to execute its long-term technique are prone to be rewarded.

Therefore, regardless of the market’s response to TSMC’s Q2 2023 earnings report, prospects for the corporate stay brilliant. With its robust place within the semiconductor trade, upcoming development in AI chips, and enticing valuation, TSMC presents a compelling funding alternative.