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Shares of Taiwan Semiconductor Manufacturing Co (TSM), the world’s largest contract chipmaker, have fallen more than -10% since posting a 6-month high in June as weakness in demand and elevated inventories plague the chip sector. The stock is also under pressure from soft global consumer electronics demand and the recent jump in global interest rates that have raised concerns about the macro environment.
Taiwan Semiconductor Manufacturing Co (TSMC) jumped 60% from last October to June due to the frenzy over everything related to artificial intelligence (AI). However, investors have become more wary about how much AI will contribute to the company’s bottom line, especially without a pickup in the smartphone and personal computer business. Also, high-end AI chip orders have slowed more quickly than expected. JPMorgan Chase believes this means a slower recovery going into 2024, saying, “With a murky macro-outlook, we expect first-half orders for 2024 to remain sluggish.”
The continued weakness in global chip demand prompted TSMC in June to warn that capital spending levels may fall to the bottom end of its $32 billion to $36 billion guidance for the year. While cuts to capital spending (CAPEX) are commonly seen as a positive sign as a cost management tool, some analysts say the recent reductions signal longer-term bearishness about chip demand and concerns about a protracted recovery. Goldman Sachs recently cut its estimate for TSMC’s capital spending for next year by more than -20% to $25 billion over concerns the company may delay its planned overseas capacity expansion.
Concerns about waning demand for TSMC’s cutting-edge 3-nanometer chip are at the heart of the recent decline in the company’s stock price. The chip was put into mass production in December and was seen as a technology breakthrough that would revolutionize everything from Apple’s (AAPL) iPhones to Nvidia’s AI generators. However, due to weak consumer demand, TSMC told major suppliers it had to delay deliveries of the chips. According to JPMorgan Chase, Nvidia (NVDA), Advanced Micro Devices (AMD), and Qualcomm (QCOM) may even delay their orders for the chips into 2025. Citigroup also said that given the lack of chip demand recovering back to pre-Covid levels, “We expect the recovery to take longer.”
Despite the setbacks in chip demand recovery, analysts remain bullish on TSMC. According to Bloomberg data, the stock has no sell ratings and a 12-month average price target that’s 24% above Monday’s close. TSMC’s leadership position in the foundry, or chip manufacturing, remains strong, with a 59% share of the global chip market in Q2, compared with an 11% share for its biggest rival Samsung Electronics, according to Counterpoint Technology Market Research. However, the expected chip inventory adjustment and recovery in chip demand is taking longer than many analysts predicted. Mizuho Securities Asia said,” We now expect such adjustment to extend into the first quarter next year, or even the second quarter due to soft end-demand.”
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.
