Shares in Taiwan Semiconductor Manufacturing Co. have lost more value than any other stock in Asia since mid-June as investors brace for continued weakness in the chip sector. The slide may not be over yet.
Since peaking in June, shares of Taiwan’s TSMC have fallen 10% and lost $72 billion from their market cap on concerns about the macroeconomic environment and weak global demand for consumer electronics. The continued rise in volatility in recent months, as traders bought up bearish contracts, points to a further decline in TSMC shares.
Shares of the world’s largest contract chipmaker rose 60% between October and June thanks to global enthusiasm for all things artificial intelligence. However, traders have become more sceptical about how much of an impact this will have on profits, especially without a boost in the smartphone and personal computer businesses. Even orders for high-end AI chips have slowed faster than expected.
For JPMorgan Chase & Co, all this means a slower recovery for TSMC into 2024, given weakness in most end markets such as PCs, smartphones and non-AI services, the analysts, including Gokul Hariharan, wrote in a recent note. “Given the gloomy macroeconomic outlook, we expect 1Q orders to remain subdued.
Meanwhile, analysts are also turning cautious on capital spending, as TSMC warned in June that the level could be at the lower end of its $32 billion to $36 billion annual forecast. Estimates compiled by Bloomberg average closer to $30 billion. While capital spending cuts are commonly seen as a positive and prudent cost management tool, analysts say the latest cuts signal a longer-term bear market in chip demand and concerns about a protracted recovery.
Goldman Sachs Group Inc. recently cut its estimate for TSMC’s capital spending next year by more than 20% to $25 billion on fears the chipmaker could postpone its planned overseas capacity expansion. That would be the least the company has spent since the pandemic began.
Twelve-month earnings estimates for TSMC were revised down about 8% from a peak in October, according to Bloomberg data, while there was little change in a broader assessment of Asia-Pacific stocks.
Part of the problem is pent-up optimism about TSMC’s state-of-the-art 3-nanometre chip. The product, which went into mass production in December, was seen as a technological breakthrough that would revolutionise everything from Apple Inc’s iPhones to Nvidia Corp’s AI generators.
But that promise has met with some setbacks due to weak consumer demand. Earlier this month, TSMC reportedly told key suppliers that it would have to delay shipments. According to JPMorgan, Nvidia, Advanced Micro Devices Inc. and Qualcomm Inc. may even postpone their orders for the chips until 2025.
Given the lack of recovery in demand to pre-Covid levels and macroeconomic weakness, “we expect the recovery could take longer,” Citigroup Inc. analysts such as Laura Chen wrote in a recent note.
However, there are still a number of positives for TSMC. Its leading position in the foundry or chip manufacturing market, with a stable 59% share in the second quarter, continues to make the company attractive. This compares with a share of 11% for its largest competitor, Samsung Electronics Co, according to Counterpoint Technology Market Research.
TSMC is also highly valued by analysts: Bloomberg data show no sell recommendations and an average 12-month price target 24% above the last closing price. As TSMC is a key foundry for companies such as Nvidia and AMD, a positive surprise in artificial intelligence in next month’s third quarter results could also lead to new buying.
However, until there is a broader economic recovery, traders will remain largely on the sidelines. According to Kevin Wang, an analyst at Mizuho Securities Asia Ltd, investors may become more cautious due to the longer-than-expected inventory adjustments at TSMC’s customers. “We now expect such adjustments to extend into the first quarter of next year or even the second quarter due to weak final demand,” he added.