TSMC Earnings: Flurry of Bad News Does Not Change our Long-Term Bullishness

We maintain our fair value estimate on Taiwan Semiconductor Manufacturing 2330, or TSMC, at TWD 850 per share (USD 137 per ADR at current exchange rates) after revising down our 2023 forecasts but retaining later-year projections. We believe TSMC remains cheap as a significant beneficiary in high performance computing, or HPC, which includes generative artificial intelligence. Although tapered guidance may pose short-term downside, market sentiment seems to be moving away from concerns of inventory correction and weak macro to consumer electronics rebound and the potential addressable market of AI.

AI is a bright spot among the bad news. TSMC says AI contributes 6% of revenue currently and is the fastest growing application at nearly 50% CAGR for the next few years. Assuming a 50% CAGR from 2023-27, this implies AI will account for about 17% of 2027 revenue and is among the largest growth contributor at 33% of incremental dollar sales.

We make no change to our capital expenditure estimates of USD 32 billion for 2023 and over USD 40 billion afterward, as TSMC should continue investments for future process nodes to seize opportunities in AI systems. With capital spending growth slowing from 2024, there is more room for dividends, and we have raised our dividend projections ending with TWD 15 per share in 2027 from TWD 13. Microsoft’s pricing reveal on AI products may have eased concerns on monetization.

TSMC anticipates its full-year 2023 topline to be down 10% instead of midsingle digits, implying no sequential growth in the fourth quarter from the third. The incremental downside comes from slower recovery of Android phones and IT spending outside of AI. Third-quarter 2023 sales, gross margin, and operating margin guidance is TWD 527 billion (USD 17.1 billion), 52.5%, and 39% at their respective midpoints. Both margins are lower than the June quarter due to ramp-up of 3nm production (lower yields) and higher depreciation.