As the COVID-19 peak effect periods expired in 2021 and 2022, the chip industry's severe shortages caused delays in other pockets of the economy, such as new vehicles and consumer electronic products. Almost everything relying on chips saw delayed orders and increased lead times.
As the environment normalizes, Taiwan Semiconductor Manufacturing (NYSE: TSM) suffers from a severe margin decline and earnings contraction. Clever value investors may want to buy the cyclical dip.
Fading Trends
Taiwan Semiconductor stock has enjoyed a near 100% rally in the past 12 months, surviving some of the more significant scares brought on by the U.S. and China clash. As China looms over the threat of invading Taiwan and the U.S. Fed raises interest rates to intentionally slow down the domestic economy, demand for semiconductors is in danger. However, as the company reported its monthly demand and revenue numbers, markets appeared to find hope regarding the stock's future. Today, tides are beginning to fade away.
As the company reports its second quarter 2023 earnings results, markets are unhappy with what they see. The stock has traded lower by as much as 3% during the pre-market hours of Thursday morning, as all the cards seem to fall out of the firm's favor.
Posting a 10% revenue decline alongside a 5% contraction in gross margins has led to a disastrous 23.3% decline in year-over-year earnings per share. The oracle of Omaha, right as always, was clever enough to foresee these contractions.
Warren Buffett has sold virtually all his stake in Taiwan Semiconductor since April 2023. Buffett had pointed to rising geopolitical tensions, especially China's invasion threat, as one of the reasons to sell the stock ahead of potential trouble. However, he could still consider purchasing the stock again once these risks clear and the stock returns to an attractive price.
Volatility Ahead
Management has provided further guidance for 2023, pointing to project delays that once excited analysts and investors. A cut in annual revenue outlooks comes as the company expects to postpone its signature Arizona project, which has now been pushed to 2025.
Posting the first earnings decline in four years, Taiwan Semiconductors is now pointing to lower capital intensity, also known as how much the company spends on equipment to fulfill future demand. Considering the slowdowns in guidance, new capacity projects and equipment investing, investors are looking down a darker lens.
As the global economy seems to slow, the demand for chips amplified by the breakout of artificial intelligence trends is following suit. These trends also severely affect companies like ASML (NASDAQ: ASML). However, ASML was able to offset some of the slowdowns by accepting a massive inflow of orders from China, which Taiwan Semiconductor has been unable to do, given its political alliance with the U.S. Taiwan Semiconductor analyst ratings have already been flattish, pointing to a mere 6% upside from today's prices.
Investors face a series of bad quarters for an otherwise well-managed and highly profitable company. Standing on the sidelines and watching the hiccups go past the stock, awaiting a better day — and price — to consider a potential buy is the better play for this name. It would be beneficial to keep some catalysts in mind, potentially fading geopolitical threats in the region and continued orders from companies like NVIDIA (NASDAQ: NVDA) to act as a bottoming factor for earnings and the stock price.
