Thursday, 30 July 2020

TSMC: 20% upside within a week

Hello friends,

As we ease into the long weekend, I would like to do a review on TSMC. Previously, I did a short introduction of the company (here). Since then, there were some rather significant developments to the semiconductor scene – rather positive ones for me personally.


Firstly, TSMC’s earnings release were above expectations. And overall revenue increase by 28% yoy and net income by 81% yoy. I think this came in rather expectedly due to the production capacity of TSMC being fully booked. I believed the stock price then was already priced in for the earnings hence there wasn’t much movement in the price despite the better than expected results.

 

Second, the recent issue of Intel’s failure to meet its demand due to shortage of supplies gave TSMC an even further boost – in two ways. I briefly talked about this problem of Intel in the previous post. AMD (one of TSMC’s main client) is a direct rival of Intel. Both are neck at neck in terms of the development CPUs scene where Intel used to hold an almost monopoly position in the past. Naturally, given the current circumstances, AMD is gaining more market share due to orders flowing in from Intel to AMD, and hence increasing their orders to TSMC. (I do acknowledge that there might be a level of client stickiness to Intel, but given the current pandemic, Intel would need a long time to be able to get its supply back on tracks.) Evidently, client stickiness is not as significant given the recent AMD’s earnings call which expects revenue to grow by 32% in 2020. AMD rose 12% in one day.

The next point is what I believed caused TSMC’s share price to increase by more than 20% in less than a week. There were rumours that Intel was considering to revamp its whole IDM model and to stop manufacturing its own chips following its 7nm chip delay. Consequently, there were speculations that the manufacturing will be outsourced to TSMC.

 

Will TSMC actually help Intel manufacture their chips?

 

I believe the situation is still rather unclear. But it is important to note that TSMC have no more capacity to manufacture the chips even if Intel decides to outsource to them. Furthermore, I am not too sure whether there will be a conflict of interest between AMD and Intel.

 

Ultimately, the prospects of TSMC are very forward-looking and the upcoming gaming consoles launch will be another potential catalyst to note. I am continuing to be bullish on this stock after these series of events and will be looking for more opportunities to add more of it into my portfolio.

 


Stay safe and healthy, 

O



*Disclaimer: I have positions in TSMC and AMD.

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