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Buffett’s Retreat Hasn’t Stopped Bulls Betting on TSMC

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(Bloomberg) — Amid a global supply glut and a retreat by billionaire investor Warren Buffett, analysts have rarely been so optimistic about Taiwan Semiconductor Manufacturing Co.

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According to data compiled by Bloomberg, all but one of the 40 who cover the stock have a buy or equivalent recommendation on the world’s biggest chip maker, a proportion that’s the highest in at least two decades.

Ahead of what analysts expect to be a weak first-quarter earnings report on Thursday, bulls say investors are already factoring in the worst impact from a backlog of supply and weak demand. The US-listed stock’s 18% gain this year trails the industry benchmark by about 3 percentage points, leaving TSMC much cheaper than its five-year average based on multiples of projected earnings.

“We are likely closer to the bottom for the industry. The longer term structural growth drivers remain intact and in fact, with higher demands for computing power amid growing applications for AI etc., we can even argue that the picture looks stronger,” said Christina Woon, an investment director at abrdn. “Against that backdrop, even with the rise year-to-date, an incumbent like TSMC is not trading at prohibitive levels.”

Susquehanna International Group analyst Mehdi Hosseini became the latest analyst to turn bullish on Monday, upgrading TSMC to positive from neutral. According to him, a ramp up of new products will fuel “modest revenue improvement” later this year after a “severe” decline in wafer shipments and revenue in the first half.

Hosseini sees quarterly earnings per share rebounding faster than revenue from the third quarter, a trend he expects to gather momentum into 2024.

That view is echoed by JPMorgan Chase & Co’s Gokul Hariharan. While he sees downside to the company outlook for this year, “we believe market expectations have already been right-sized,” Hariharan wrote in an April 10 note. He expects focus to shift toward a potential 2024 rebound “in the near to medium term.”

The sentiment follows a host of top fund managers touting the opportunity for the broader chip sector in coming months. Allianz Global Investors sees a bottom for sales in the second quarter, while Pictet Asset Management Ltd. forecasts an earnings trough during the first half.

With TSMC shares trading at about 14.8 times estimated earnings, much lower than its five-year average of 21 times, valuation forms another string to the bulls’ bow.

Optimists also point to the company’s strong position in AI as presenting potential revenue upside. TSMC forges chips for the likes of Nvidia Corp., which makes semiconductors that are used to train and refine artificial intelligence systems. Earlier this year, Nvidia offered a bullish outlook for the quarter thanks to its AI applications.

To be sure, investors still have plenty of grounds to be wary. Geopolitical tensions between China and Taiwan remain high, which Buffett cited for his decision to cut his stake in TSMC by 86% in the fourth quarter.

Then there are concerns about a cut in guidance with Thursday’s results after the company announced “very weak” monthly sales for March, said Vey-Sern Ling, managing director at Union Bancaire Privee.

The firm is expected to report a 7.9% year-on-year revenue decline for the second quarter, although consensus is that the period will mark the bottom, according to Bloomberg-compiled data.

Yet most investors and analysts remain optimistic that a recovery in demand can provide the next catalyst.

“Longer term, I think there should be no argument about high structural demand that can support TSMC’s growth,” said Union Bancaire Privee’s Ling.

Tech Chart of the Day

While Rivian Automotive Inc.’s average price target has dipped to the lowest level ever, it’s still about double the stock’s last closing price of $13.73. That makes the maker of plug-in pickups the Nasdaq 100 component with the highest return potential, according to data compiled by Bloomberg. Rivian has fallen 92% from its 2021 peak as investors have shied away from unprofitable companies such as many electric-vehicle makers that depend on access to cheap capital to fund their businesses.

Top Tech Stories

  • SpaceX is aiming to launch its next-generation Starship rocket on April 20, the second attempt for the groundbreaking flight after a pressurization issue upended the company’s initial test.

  • Kojima Industries Corp. is a small company and little-known outside Japan, but its modest role in the automotive supply chain is a critical one. And when the company was hacked in February 2022, it brought Toyota Motor Corp.’s entire production line to a screeching stop.

  • Ericsson AB, one of the world’s biggest providers of 5G networking equipment, said late Monday that its chief financial officer will step down at the end of the first quarter of 2024.

  • Elon Musk wants to create a rival to artificial intelligence phenom ChatGPT. In an interview with Tucker Carlson on Monday, Musk confirmed that he has plans to create a “third option” in the AI race between Microsoft Corp.-backed OpenAI and Alphabet Inc.’s Google and DeepMind.

–With assistance from Jeanny Yu, Cindy Wang and Subrat Patnaik.

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©2023 Bloomberg L.P.


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