(Bloomberg) — US-China trade tensions and plunging demand for electronics are prompting analysts to slash their earnings estimates for the semiconductor industry at the fastest pace since 2008. Not, though, for Taiwan Semiconductor Manufacturing Co.
That paradox means there’s ever more pressure on the company, the world’s largest contract chipmaker, to report reassuring earnings Thursday. Even as TSMC has lost $319 billion in market value since a peak in January, analysts have been raising their sales and profit estimates for the year. Should that optimism turn out to be misplaced, forecasts and the stock price are likely to tumble.
Tighter US controls over chip exports to China, announced last week, could result in TSMC losing clients or suspending some production in the country, analysts and investors say, adding to existing risks over high inventory levels and a potential global recession. Those factors may not be fully reflected in earnings estimates.
“We can’t rule out the possibility that TSMC could be forced to suspend some of their businesses with Chinese customers,” Morningstar Inc. analyst Phelix Lee said. “It’s an undervalued stock from a long-term perspective, but I’m cautious because the near-term headwinds are just too many.”
China accounts for about 12% of TSMC’s revenue, Lee said. By comparison, SK Hynix Inc. gets about 30% of its revenue from China while Samsung Electronics Co. has about 13% of its sales from the nation, according to data compiled by Bloomberg.
TSMC has plunged 35% this year, including a record 8% drop Tuesday, and now has surpassed Tencent Holdings Ltd. as Asia’s biggest loser of market value this year.
The shares trades at about 10.6 times estimated earnings for the next year, the lowest level in more than a decade, according to data compiled by Bloomberg. The company is now cheaper than most of the members of the Philadelphia Stock Exchange Semiconductor Index, which tracks the biggest US-listed semiconductor companies.
Hsinchu-based TSMC’s third-quarter report on Thursday will include guidance for fourth-quarter margins, inventories and revenue. The potential effect of the China ban will be among the key questions from investors, according to Citigroup Inc.
“Most of TSMC’s advanced nodes are for US clients such as Apple, Qualcomm, AMD and Nvidia,” Citi analysts including Laura Chen wrote in a note. “However, with more business restrictions, its clients’ business in China could also be negatively impacted in the longer term.”
Analysts have cut the average target price for TSMC’s stock by more than 20% since February as investors reassess global demand for smartphones, personal computers and cars amid rising recession risks.
They’ve resisted lowering their earnings estimates, though, in part because the company has been gaining market share in advanced chips and it’s been charging higher prices. A growing global glut of chips may soon force analysts’ hands.
“With the latest US ban, the inventory adjustment may take longer than previously expected,” said Quincy Liu, chairman of Shin Kong Investment Trust Co. “The inventory correction may be prolonged and delay demand recovery.”
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