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Intel INTC is scheduled to report second-quarter 2023 results on Jul 27 after market close. Let’s take a closer look at its fundamentals ahead of the earnings release.Intel has risen about 14% in the past three months, underperfor
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TSMC's (NYSE: TSM) stock dropped 5% on July 20 after the chipmaking giant posted its second-quarter results. Its revenue declined 14% year over year to $15.68 billion but beat analysts' estimates by $300 million. Its earnings per ADR also fell 26% to $1.14 -- its first profit dec
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The ongoing U.S.-China chip war has added a layer of complexity to the future of semiconductor stocks. Washington’s semiconductor export restrictions, and China’s retaliatory
ban on the use of Micron’s (
NASDAQ:MU
) chips by its key infrastructure operators, imply future difficulties. More semiconductor companies could bear the brunt of sales and margin loss if the technology and trade war escalates further.
Following the ban on MU,
Robert W. Baird analyst Tristan Gerra highlighted in a note dated May 22 that casualties of the ongoing chip war between the U.S. and China have increased with time. Moreover, the analyst expects a negative impact on more companies in the semiconductor sector if tensions rise further.
More Casualties of the Tech and Trade War
The analyst noted that the trade conflict has weighed on Ambarella’s (
NASDAQ:AMBA
) market share in the surveillance camera market in China. Meanwhile, Qualcomm (
NASDAQ:QCOM
) could lose market share to MediaTek, a Taiwan-based fabless semiconductor company, in the smartphone market.
It’s worth highlighting that a significant portion of Qualcomm’s business is concentrated in China. Thus, the U.S.-China trade and national security tensions increase the concentration risk for the company. QCOM sees continued intense competition in China and expects the ongoing tensions to negatively impact its business.
Ambarella, like many other companies, highlighted that trade tensions between both countries have been escalating, which has created an uncertain business environment. While export controls do not restrict the company’s current products, it believes that stringent export restrictions could impact its future business in China. Further, the company thinks that retaliation from the Chinese government could
take a toll on its financials.
The management of Intel (
NASDAQ:INTC
), another significant semiconductor manufacturer, has stated that the trade restrictions, which apply to some of its products, have affected customer ordering patterns in China, which has led to reduced sales. Moreover, future restrictions will likely hurt its financial performance, as revenue from billings to China contributed about 27% to its total revenue in 2022.
The U.S. Chip Companies Lobby Against More Restrictions
The
top executives from semiconductor companies, including Intel, Qualcomm, and Nvidia (
NASDAQ:NVDA
), met with Biden administration officials to discuss China trade policy and convince them to refrain from implementing stricter export restrictions. The move comes after the Biden administration indicated it would further strengthen its export controls to China.
China is an important market for all these companies, as they generate a considerable portion of their revenues and margins from the Chinese market. Thus, the passage of any stricter laws on exports will likely hurt their market share, revenues, and overall business.
These semiconductor businesses still deal with geopolitical and security challenges, regardless of whether the Biden administration goes forward with a tighter export policy. Against this backdrop, let’s understand what the Street recommends for these
chip stocks.
What's the Best Semiconductor Stock to Buy Right Now?
TipRanks’
Stock Comparison tool shows that Advanced Micro Devices (
NASDAQ:AMD
) and Nvidia sport a Strong Buy consensus rating. Moreover, shares of both of these companies also carry a Strong Buy consensus rating from the
Top Wall Street analysts. The significant growth opportunity from growing
AI (Artificial Intelligence) applications keeps analysts bullish on these stocks.
Investors should note that TipRanks identifies the Top Wall Street analysts per sector, per timeframe, and against different benchmarks. The ranking shows an analyst’s ability to deliver higher returns through recommendations.
Besides for AMD and NVDA, Wall Street analysts are cautiously optimistic about MU, QCOM, and AMBA stocks. As for INTC, which is scheduled to announce Q2 earnings on July 27, analysts maintain a Hold. Analysts expect Intel to post a
loss of $0.04 a share in Q2, compared to earnings of $0.29 a share in the prior-year quarter.
The Factory underload charges, increased sample costs, and higher inventory reserves will likely hurt INTC’s margins and profitability in Q2. Further, the risk of market share losses keeps analysts sidelined.
Disclosure
Driven by a surge in demand for artificial intelligence, Taiwanese chip maker TSMC plans to invest nearly T$90 billion ($2.87 billion) in an advanced packaging facility in northern Taiwan, the company said on Tuesday.
Shares of Taiwan Semiconductor (
NYSE:TSM
)
dipped by about 5% last Thursday following the company's
Q2 report, with results coming in somewhat mixed. Specifically, the semiconductor manufacturing giant is currently facing several industry headwinds, resulting in shaky demand dynamics that have, in turn, negatively affected its short-term financials.
Although Taiwan Semiconductor may continue to face such pressure for the remainder of the current year, substantial improvements are anticipated starting next year. The semiconductor industry is expected to experience a vigorous rebound in earnings as macroeconomic uncertainties gradually ease, revitalizing demand for semiconductors.
Overall, I believe that shares of Taiwan Semiconductor appear heavily discounted against the company's future earnings growth estimates, likely signaling a buying opportunity following the recent dip. Accordingly, I am bullish on TSM stock.
What is Currently Negatively Affecting TSM's Operations?
TSM's operations have faced several challenges lately due to the semiconductor industry's undergoing a down cycle. As the leading semiconductor foundry, TSM plays a crucial role in enabling the world's largest technology companies, such as Apple (
NASDAQ:AAPL
), Nvidia (
NASDAQ:NVDA
), Qualcomm (
NASDAQ:QCOM
), and Advanced Micro Devices (
NASDAQ:AMD
), to bring their chips to life using its proprietary technology.
The current short-term downturn can be attributed to a convergence of various factors, including surging inflation, geopolitical tensions, and the ongoing aftermath of the pandemic, during which consumers purchased electronic devices in bulk.
This complex interplay of these circumstances has resulted in heightened macroeconomic uncertainty, a decline in consumer spending, and notable fluctuations in the demand for semiconductors. Moreover, reduced spending on consumer electronics, such as PCs, smartphones, and tablets, has further contributed to a diminished demand for the semiconductors that power these devices, ultimately impacting TSM's performance.
Q2 Results: Financials Weighed Down by Macroeconomic Challenges
Due to the current challenges just mentioned, TSM's financials were weighted down in Q2. In particular,
second-quarter revenue fell 6.2% sequentially or 13.7% year-over-year to $15.7 billion, with global economic conditions dampening end-market demand, which led to an unfavorable inventory adjustment by TSM's customers.
Gross margins also fell by 220 basis points sequentially to 54.1%, primarily reflecting lower capacity utilization and higher electricity costs. Thankfully, more rigorous cost control and a more favorable foreign exchange rate partially offset these challenges. Nevertheless, despite the industry's cyclical downturn, TSM continued to invest in R&D for its N3 and N2 technologies development, which further compressed operating margins by 350 basis points to 42%. As a result, EPADR (earnings per American Depositary Receipt) fell by 26.5% to $1.14 from last year.
Weak Performance to Persist This Year, but a Recovery Looms
A somewhat soft environment for semiconductors is expected to persist throughout the rest of this year. TSM's management expects Q3 revenues to land between $16.7 billion and $17.5 billion, which indicates a 9.2% sequential improvement but a year-over-year decline of 14.9% from last year's $20.2 billion.
Further, gross margins are expected to range between 51.5% and 53.5%, while operating margins should range between 38% and 40%. This indicates a further decline from last quarter's gross and operating margins of 54.1% and 42.0% and a steep drop from Q3-2022's gross and operating margins of 60.4% and 50.6%.
That said, TSM's performance is expected to improve in the near future as macro challenges ease, lifting the industry from its current downturn. Management noted their optimistic Q4 outlook during the post-earnings call, anticipating a substantial ramp-up of TSM's 3-nanometer production, which should boost gross margins by three to four percentage points from Q3. Additionally, management foresees a long-term gross margin of 53% and higher, indicating a potential recovery in profitability.
This theme is also reflected in Wall Street's estimates, which also seem to forecast a recovery in the semiconductor industry and, therefore, in TSM's revenues and profitability. While earnings per ADR are anticipated to be approximately 25% lower in Fiscal 2023 compared to the previous year, they are forecasted to make a robust rebound of 24% to reach $6.12 in Fiscal 2024. Moreover, earnings per ADR are expected to experience a significant increase of 34% to reach $8.19 in Fiscal 2025.
Such wild swings in profitability highlight TSM's highly-cyclical business model, serving as a reminder that this year's seemingly unfavorable results are typical market reactions and should not overly concern investors.
Is TSM Stock a Buy, According to Analysts?
Regarding Wall Street’s sentiment, Taiwan Semiconductor features a Strong Buy consensus rating based on four Buys and one Hold assigned in the past three months. At $125.00, the average
TSM stock price target implies 27.2% upside potential.
Takeaway - A Discounted Valuation Relative to Earnings Growth Potential
While Taiwan Semiconductor stock faced a 5% dip following its admittedly mixed Q2 report, the company's short-term challenges are not unexpected given the cyclical nature of the semiconductor industry. As macroeconomic uncertainties gradually ease, a robust rebound is expected, which should result in a strong rebound in TSM's profitability.
In fact, based on Wall Street's estimates, the stock is currently trading at approximately 16 times its Fiscal 2024 expected EPADR and 11 times its Fiscal 2025 expected EPADR, presenting exceptionally attractive multiples for an industry behemoth like TSM, upon which a great chunk of the globe's semiconductor manufacturing capacity relies.
Consequently, I view the current dip in TSM stock as a compelling buying opportunity, given that shares seem heavily discounted when considering their earnings growth projections.
Disclosure
Cadence Design Systems Inc on Monday raised its full-year revenue forecast to slightly above Wall Street estimates, as a surge in artificial intelligence (AI) innovation fueled demand for custom semiconductor design.
In the latest trading session, Advanced Micro Devices (AMD) closed at $110.61, marking a -0.31% move from the previous day. This change lagged the S&P 500's daily gain of 0.4%. Elsewhere, the Dow gained 0.52%, while the tech-h