For most of 2022, the market has been heavily influenced by high inflation fears, tightening monetary policy, and geopolitical issues. To put things into perspective, the S&P 500 has slid close to 7.5%, the Dow has retreated 5%, and the Nasdaq has taken the biggest hit, down 14% year-to-date.

Now, earnings season is almost in full swing, which means we finally get to see the long-awaited Q1 results from companies. Earnings season is one of the most exciting times of the year to be an investor because it’s when stocks typically see the most movement and companies provide guidance moving forward.

For Q1, investors will be laser-focused on how companies have dealt with adversity brought about by supply-chain bottlenecks, rising energy prices, higher labor costs, and other economic restraints. It comes at a critical time; investors are unsure of which direction the market wants to take as we sit in one of the most unique economic environments in recent history.

Nonetheless, Fed Chair Jerome Powell believes that the economy stands to “flourish in the face of less accommodative economic policy.” Additionally, household income, consumer spending, and the labor market are all strong, perhaps signaling that calm waters are on the horizon.

Semiconductor Rundown

Semiconductors are a bright spot of modern technology and are essentially the foundation of life as we know it anymore. About the size of a small coin, semiconductors enable everything to work correctly, including mobile devices, cars, computers, and even freezers. Simply put, we can’t get away from them.

With the world gripped by COVID-19, semiconductor-enabled technologies allowed us to work, study, and stay connected remotely while the rest of the world quickly shut down. In turn, semiconductor stocks soared to new heights with no signs of slowing down. However, the same stocks have taken a downwards trajectory in the recent term with the sell-offs we’ve seen in the market. Year-to-date, the iShares Semiconductor ETF (SOXX Quick QuoteSOXX - Free Report) is down almost 21%, while the S&P 500 is down nearly 7.5%.

Unanticipated demand during the pandemic sent the semiconductor supply chain entirely out of equilibrium, and the effects have been felt worldwide. The average amount of time between purchase and delivery of semiconductors (lead times) has skyrocketed, causing companies to stack up inventory levels months in advance. Demand has been and continues to remain out of this world.

Taking note of the issue, the U.S. Senate passed the United States Innovation and Competition Act (USICA) in June 2021 which has over $50 billion dedicated to enhancing domestic chip manufacturing, research, and design. Many analysts believe the chip shortage will subside in late 2022 and continue unwinding in 2023.

Being a cyclical sector, this alludes me to believe that there will be a period of oversupply at some point. However, with such robust demand, semiconductor stocks are still poised to rise significantly as we become ever so reliant on this technology. We can’t imagine a future without it, and I believe chip stocks will be beautiful investments over the next decade as supply-chain headaches continue to unwind from a boom in demand and an unprecedented pandemic.

Taiwan Semiconductor

An established semiconductor name and one of the companies slated to release its 2022 Q1 earnings this week is Taiwan Semiconductor (TSM Quick QuoteTSM - Free Report) . The company resides in the Zacks – Computer and Technology Sector, which is currently ranked eighth out of 16 total sectors and has a year-to-date performance of -15%. Let’s take a look at recent share performance, previous earnings reports, and what analysts are expecting for Q1.

TSM shares have been tumbling in the market year-to-date, down nearly 19% and far underperforming the S&P 500. The rocky price action has caused its forward earnings multiple to slide down to 18.3X, a fraction of its 2021 high of 34.9X and notably lower than its median of 19.9X over the last five years. To me, this is a cheap opportunity to buy TSM shares relative to the levels it has been over the past years.

Image Source: Zacks Investment Research

In its 2021 Q4, TSM beat the Zacks Consensus Estimate of $1.12 per share by a marginal 2.7% and officially reported EPS of $1.15. Exceeding earnings expectations has been the norm for the company over its last four quarters, beating estimates each time and acquiring an average EPS surprise of nearly 4%.

Estimates for Q1 and full-year 2022 sales are very promising. The Zacks Consensus Sales Estimate of nearly $17 billion for the upcoming quarter crushes 2021 Q1 sales of $12.9 billion and reflects a massive 32% jump in the top line. Additionally, the Zacks Consensus Estimate of $73.1 billion in sales for FY22 represents a year-over-year top-line surge of nearly 30%.

TSM Quarterly Revenue

Image Source: Zacks Investment Research

Earnings estimates for the upcoming quarter and full fiscal year are just as robust. Look out for the Q1 report on Thursday, as the Zacks Consensus Estimate of $1.27 per share reflects a stellar year-over-year increase in earnings of nearly 33%. For FY22 EPS, the story is almost the same; the Zacks Consensus Estimate of $5.42 per share represents a sizable 32% increase year-over-year from FY21. Furthermore, over the last 90 days, Q1 estimates have increased nearly 12%, and FY22 estimates have increased 4.3%.

Heading into Q1, estimates look rock-solid, but investors must be aware of the current market sentiment. So far, 2022 has not been the year for chip names, clearly seen from the adverse price action. However, I believe that TSM is poised to climb significantly as microchips increasingly become a crutch in our society, and its strong projected growth rates further bolster my confidence in this. TSM is currently a Zacks Rank #3 (Hold) and has an overall VGM Score of a B.

Peer Comparison

Let’s take a quick look at another player in the chip arena, Advanced Micro Devices (AMD Quick QuoteAMD - Free Report) .

AMD has seen its current year earnings estimate decrease by 0.3% over the last 60 days, and the company’s next-quarter EPS estimate has remained unchanged at $0.91 per share. AMD has an average four-quarter trailing average EPS surprise of 17%, and in its latest quarter, AMD beat estimates by nearly 23%.

AMD’s full-year earnings are forecasted to grow 43% year-over-year, and the company is expecting bottom-line growth of 30% over the next three to five years. Additionally, AMD shares have slid 32% year-to-date.

AMD is a Zacks Rank #3 (Hold) with an overall VGM Score of a B.