How Taiwan Semiconductor Plans To Address Chip Shortage?

Rising Chip Demand

Taiwan Semiconductor Mfg. Co. (TSMC) is gearing up towards increasing its manufacturing capacity and cater to the rising demand for semiconductors. The company’s management elaborated on the company’s plans on an earnings call following the release of the 1Q 2021 results.

TSMC (TSM) believes that a combination of factors, including the rise in the number of people working from home as a result of the COVID-19 pandemic, continuing demand for 5G, and high-performance computing (HPC) applications has fuelled semiconductor demand.

Chip Shortage Woes

TSMC stated at its earnings call that it expects its customers to maintain high levels of chip inventory in FY21 due to chip supply constraints. The company also said that it anticipates its supply capacity to continue to remain tight in the second half of this year. The company foresees the chip shortage continuing into 2022 but expects component shortages for automotive sector customers to be reduced by a great extent in the second quarter.

These chip shortage woes could be exacerbated as Taiwan, where TSMC is headquartered, is facing its worst drought in the past 50 years. This could affect semiconductor manufacturing capacity, according to a Wall Street Journal report from April 16. However, at its earnings call, TSMC assured analysts that despite the current orders from the Taiwanese government to reduce water usage, its manufacturing operations had not been affected so far. (See Taiwan Semiconductor Mfg. Co stock analysis on TipRanks)

Increasing Capex Spend

The company expects to invest $100 billion over the next three years to increase chip manufacturing capacity, support semiconductor manufacturing, and maintain R&D of other advanced technology processes. This includes a capex spend of $30 billion in FY21 which is expected to rise into the “mid-30s” (in billions) over the long term.

The company expects to spend 80% of its capex on advanced process technologies including 3-nanometer (nm), 5-nm, and 7 nm.

While the company is currently in the process of setting up a 12-inch semiconductor foundry in Arizona and has already completed the installation of the first phase of its 20,000 wafers capacity foundry in Nanjing, China, it currently has no plans to set up its foundries in Europe.

TSMC’s Fiscal Outlook

In the fiscal second quarter, TSMC expects revenues to range between $12.9 billion and $13.2 billion, “flattish” year-on-year as the company expects demand for HPC chips to grow while being offset by the seasonality factor affecting the demand of smartphones.

The company anticipates revenues to grow over the long term from 2020 to 2025 at a compounded annual growth rate (CAGR) of between 10% and 15%. TSMC expects that its N5 chip (5-nm chip) will make up around 20% of its chip revenues in FY21 and expects the demand for the chip to grow even higher.

Based on the exchange rate of $1 to NT$28.4, TSMC anticipates gross profit margin to be between 49.5% and 51.5% and operating profit margin to land between 38.5% and 40.5%. TSMC considers a gross margin target of 50% “achievable”.

TSMC expects that the market for semiconductors could grow at around 12% (excluding market for memory chips) while the foundry industry could grow by around 16%. However, the company expects to exceed this industry growth and foresees foundry revenue rising by approximately 20% in FY21 in US dollar terms.

Wall Street’s Take

On April 15, Susquehanna analyst Mehdi Hosseini upgraded his price target from $83 to $85 and reiterated a Sell on the stock. Hosseini said that while the rise in capex will drive the growth in revenues, he also anticipates higher depreciation and operating expenses to drag down the CAGR for EPS.

Overall, the Street is sidelined on the stock with a Hold consensus rating based on 2 Buys, 2 Holds, and 1 Sell. The average analyst price target of $83 implies 28.6% downside potential from current levels.

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