TSMC Soars As Analysts Project Revenue Growth & $42 Billion In Capital Expenditure

Ramish Zafar
Image: Ann Wang/Reuters

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The Taiwan Semiconductor Manufacturing Company (TSMC) is expected to significantly increase its capital expenditure for the current year as it heads toward reporting its financial results for the fourth quarter of and the full fiscal year 2021. Heading into TSMC's earnings results, which are due next week, the company's share price for its American Depository Receipts (ADRs) has sharply increased, and investment banks JPMorgan and UBS both expressing strong optimism for the upcoming results.

TSMC Receives Strong Price Targets From JPMorgan And UBS Ahead Of Earnings Report Causing Sharp Share Price Appreciation

According to the Taiwanese news outlet United Daily News (UDN), investment banks JPMorgan and UBS are highly optimistic about TSMC's future. The pair set their price targets for the contract chip manufacturer to NT$780 and NT$740, respectively yesterday. Their decision resulted in TSMC's share price on the Taiwan Stock Exchange and the NYSE significantly rising.

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The shares opened at NT$619 on Monday in Taiwan and peaked at NT$667 yesterday before settling down to NT$644 today. This marked for a 4% overall growth, which is in the same overall range as the growth exhibited by the ADRs trading on the NYSE. The ADRs closed at $120 in 2021, went on to peak at $134 on Tuesday before closing at $127 yesterday to mark for a 6% growth.

To justify the price targets, both banks believe that TSMC will post revenue growth for its first quarter. JPMorgan outlines that the revenue can grow by 5% while UBS has a lower 2% growth estimate. For the gross margin, which is the proportion of the company's post-direct-costs revenue with overall sales, JPMorgan expects the metric to sit at 53.7% while UBS expects a 52.6% gross margin. Both Alethia Capital and HSBC had speculated in August last year that TSMC's gross margins for 2021 could range between 53% and 55% due to price increases The gross margin for 2020 stood at 53%.

Additionally, JPMorgan also believes that a potential slowdown in the demand for mature semiconductor processes in the second half of this year will be mitigated due to the demand increasing for 5-nanometer (nm) chip products as companies such as Qualcomm Incorporated pick up the pace.

TSMC earned NT$ 61 billion in the second quarter of 2021 with its 5nm chip manufacturing process. Image: TSMC Form 6-K

TSMC, which is not only building a new semiconductor fabrication facility in the United States but also in Taiwan, has been aggressively growing its capital expenditure to fund the projects, after having announced $100 billion for the three years starting from 2022. According to UDN, this can increase by as much as 12% to sit at $120 billion since new projects such as an announced facility in Japan and a potential plant in Germany were not included in the announcement.

The capital expenditure for 2022 might sit at $38 billion and grow to $40 billion next year believes the publication. JPMorgan's report referenced above expects it to it at a market high estimate of $42 billion for this year. Furthermore, UDN's source also reports earlier rumors that Intel Corporation and Apple Inc will be TSMC's largest customers for the leading-edge 3nm semiconductor process, which is expected to contribute 16% to the company's revenues in 2023.

Commenting on the high hopes for capital expenditure, analyst Lu Xingzhi believes that it is important to determine which facilities will receive the additional funds. According to him, TSMC's facilities in Japan and Taiwan, including a plant for 2nm chips might be the lucky ones. Lu estimates that the capital expenditure for this year to stand between $35 billion and $40 billion.

The analyst also wonders whether the improved margins and price increases can offset the larger depreciation expenditures due to higher capital investment. In financial terms, a fixed asset is depreciated each year to reduce its value and reflect the benefit extracted from it, with the non-cash expense reflected on the company's income statement. Finally, the analyst is uncertain about whether TSMC will be able to avoid any negatives from increasing its capacity for Intel's short-term chip needs as the U.S. company shifts to its own production facilities in the long term.

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