Analyst Note| Abhinav Davuluri, CFA |
TSMC reported second-quarter results consistent with management’s guidance as strong demand for high performance computing, or HPC, chips and the ongoing ramp of 5G smartphones helped the firm overcome coronavirus-driven headwinds. We remind investors that the firm enjoyed an easier comparison from the same period in 2019, which was negatively impacted by elevated inventories related to the cryptocurrency crash and softer smartphone demand. Management was upbeat about the remainder of 2020 and called for greater than 20% revenue growth for the full year, which we attribute to strong demand from Apple, AMD, and Nvidia. Concerning 5G, management anticipates penetration in the high teens (from mid-teens previously) while global smartphone unit growth will be down in the low teens for 2020 (versus down in the high single digits as disclosed last quarter). Taken together we believe these trends will offset each other, though management was adamant that its 5G unit forecast is higher. We are raising our fair value estimate to USD 51 (TWD 306) per share from USD 46 (TWD 276) as we incorporate a superior near-term outlook. Nonetheless, given the bevy of uncertainties with potential supply chain disruption and end-market demand associated with the COVID-19 recovery, we recommend prospective investors wait for a wider margin of safety, especially as shares of narrow-moat TSMC are up over 50% from mid-March lows.