Taiwan Semiconductor - Top Chipmaker Is Down 45%

The world’s leading chipmaker is scheduled to report earnings on Friday. The chip industry has been under pressure of late, with demand fears and growth slowdowns coming to the forefront of the market mind. Taiwan Semiconductor stock is down 45% from the highs and our pick for stock of the week.

If in doubt, zoom out! To the weekly chart:

We can add Taiwan Semi (TSMC) to the long list of stocks that have fallen back to their pre-Covid pricing and then bounced. But what does the future hold? That’s always the burning question…

If Samsung’s profit slump is anything to go by, the near future might not be too bright for TSMC. Last week, the Korean giant reported seriously weak preliminary numbers. In the final three months of 2022, Samsung’s operating profit fell by 69% to 4.3 trillion won ($3.4 billion), well below the average analyst estimate of 6.7 trillion won.

The company summed things up in a statement:

"For the memory business, the decline in the fourth quarter demand was greater than expected as customers adjusted inventories in their effort to further tighten finances, spurred by concerns over deteriorating consumer sentiment"

"Profits from the mobile experience business declined as smartphone sales and revenue decreased due to weak demand resulting from prolonged macro issues."

Which adds to concerns about the viability of the company’s huge investment plans. In fact, TSMC is facing a similar issue. The company is looking to diversify production, with facilities in the US, China & Japan all in the pipeline.

Could a global downturn actually be good for the company’s bottom line?

Sounds counterintuitive, but TSMC’s new facilities are being built for all the ‘wrong’ reasons from a profitability perspective. The diversification of production is intended to ensure continued capability to operate if China were to reclaim Taiwan by force and also in response to worsening trade ties (and accompanying sanctions) between the US and China.

As the leading chip foundry globally, could the company be positioned to claim market share in a downturn? Simultaneously cutting back on the expensive global expansion plans due to macro factors while competitors such as Samsung struggle could become an opportunity for TSMC. Friday’s earnings report will be a key barometer of how the firm is weathering the storm.

The first Arizona facility is set to come online by 2024, and expects to manufacture 4 nanometer chips for Tesla, as well as the more advanced 3 nanometer chips for Apple.

However, the company announced that it plans to increase the investment in Arizona, and triple the initial investment (to $40 billion) for further plants and capacity in the state.

Is this a step further than necessary? Would markets reward a reduced investment with a higher share price in the current investing environment?

TSMC reports earnings on Friday, so an update could be forthcoming.

Last week's US jobs data showed signs of weaker wage pressure and workers returning to the labour force. A soft landing ahead for the US economy could be an encouraging step.