TSMC’s US$240 billion rout sees no sign of ending

The decline of Taiwan Semiconductor Manufacturing Co (TSMC), a stock that has lost NT$7.7 trillion (US$240 billion) in market value this year, probably has more room to run as analysts slash their price targets amid the bleak outlook for the global chip industry.

At least eight investment banks and research firms have cut their 12-month share-price estimates for the world’s biggest contract chip maker this month, according to Bloomberg data. On October 13, Goldman Sachs lowered its target by 29 per cent to NT$445 (US$13.90), HSBC slashed its target by 36 per cent to NT$445 and Morningstar cut its projection by 14 per cent to NT$850.

The bearish mood was preceded by a retreat among some of the biggest money managers. BlackRock, which manages about US$8 trillion of assets, sold 51 million TSMC shares in recent regulatory filings, while funds managed by Invesco and JPMorgan Chase also pared their holdings.

“We have cut our fair value estimate for TSMC as we bake in more conservative assumptions on high-performance computing demand in 2023 and 2024,” said Phelix Lee, an analyst at Morningstar in Hong Kong. Sluggish PC demand and rebalancing of enterprise computing operations will hurt 2023’s outlook, “in light of fresh US restrictions on doing business with Chinese customers.”

TSMC fell 3.2 per cent to NT$399 as of 1.15pm local time in Taipei on Monday, after sliding to NT$395 last week, the lowest level since July 2020. Still, the stock has lost a third of its value this year, larger than the 28 per cent drop in the Taiex index.

TSMC is the most valuable constituent of the benchmark gauge, with a commanding 26 per cent weighting. Its third-quarter results beat estimates, but was overshadowed by a decision to cut its 2022 target for capital expenditure by 10 per cent in a sign of weakening demand.

TSMC and other major chip makers have quickly fallen out of favour with traders after the US once again tightened its curbs on exports of semiconductors to China earlier this month. The new restrictions cover exports of some chips used in artificial intelligence and supercomputing as well as sales of semiconductor manufacturing equipment to any Chinese company.

The newest sanctions have further dimmed the prospects for a global chip sector that is already grappling with waning demand for consumer electronics amid fears of an economic recession.

“Historically, a sharp decline in semiconductor sales usually presages a global recession,” strategists at Alpine Macro wrote in an October 17 report. “Longer term, we see the potential for widespread price destruction in the semis sector.”

The Taiwan stock market has also faced the military threat from China, which regards the island as a renegade province, following visits by US politicians and lawmakers. The fate of TSMC is often tied to Taiwan’s relations with Beijing, though the island’s top officials have played down the issue.

“If you understand the ecosystem of TSMC, the comments out there are unrealistic,” Bloomberg reported Chen Ming-tong, director general of Taiwan’s National Security Bureau, as saying last week. “Even if China got a hold of the golden hen, it won’t be able to lay golden eggs.”

TSMC has a market capitalisation of US$335.2 billion, about five times bigger than US chip maker Applied Materials, according to Bloomberg data. Semiconductor Manufacturing International Corp, China’s biggest chip maker, is valued at US$22.1 billion.

TSMC has a consensus 12-month price target of NT$630.45, implying a 52 per cent gain from Friday’s close, according to the estimates of 32 analysts tracked by Bloomberg. Analysts have been lowering their projections for TSMC’s stock price since February, when the consensus peaked at NT$850.53.

To be sure, some analysts are bullish on TSMC when looking at a more distant horizon, arguing the stock is undervalued and product demand will remain strong in the long term. The company is valued at 10.3 times estimated earnings, the cheapest in seven years, according to Bloomberg.

Yet, the stock will be in for more volatility at least in the foreseeable future as escalating geopolitical tensions further undermine confidence, according to Lee at Morningstar.

“Short-term uncertainties over foundry demand will increase, as China is the world’s second-largest cloud computing market, and local cloud service providers may struggle to secure chips for their expansion initiatives,” Lee added. “The new shock may further dampen sentiment in a sector that is already ravaged by weak consumer electronics demand.” South China Morning Post