TSMC Earnings: Possible Upside in Long-Term Outlook as AI Becomes Hot

We maintain our fair value estimate on Taiwan Semiconductor Manufacturing Co. TSM at TWD 850 per share (USD 139 per ADR at current exchange rates) as the effects of our lower 2023-27 revenue and 2023 capital expenditure forecasts offset each other. We believe TSMC remains undervalued as it is a significant beneficiary in high-performance computing, with upside surprise potential from generative artificial intelligence. While its first-quarter revenue and second-quarter guidance trailed our expectations, we see limited share price downside as inventory correction is priced in, but confidence in TMSC’s long-term outlook has been renewed by its resilient capital spending budget.

We reduce our 2023 capital expenditure estimate by just under 10% to USD 32 billion even though management reiterated its budget of USD 32 billion-USD 36 billion. This is because we are seeing slower billings at its supplier ASML, and management is expecting inventory correction to last around three months longer on end demand, ending in the September quarter. We assume the temporary decrease in capital spending comes from reductions at 5-nanometer, 7 nm, and 28 nm for existing nodes and slight delays in 2 nm delivery. We remain confident of TSMC’s long-term outlook fueled by HPC growth, with possible incremental upside from AI, as AI systems become more common while a subset of such systems that aims to develop humanoid thinking skills should require even more processing power. Because of HPC and the company showing more interest in building an automotive-oriented site in Europe, we maintain our midcycle capital intensity of mid-30s with north of USD 40 billion to be spent in 2024.

TSMC anticipates second-quarter sales, gross margin, and operating margin to be TWD 474 billion (USD 15.6 billion), 53%, and 40.5% at their respective midpoints.