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Taiwan Semiconductor Shares Rise on Hopes of Lower Fallout from U.S. Curbs
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At a time when the global chip industry was reeling from the post-pandemic pullback in demand, the Biden administration announced restrictions on their trading with China. Chipmakers were expecting such an announcement for months, but the actual event is having the expected impact on share prices.
Not all chipmakers will be affected the same however. Companies like Intel (INTC - Free Report) , which is reportedly considering headcount reductions will be affected. And Taiwan Semiconductor (TSM - Free Report) , which generated 8% of its revenue from China in the last quarter will also be affected, but to a lesser extent.
In fact, most of the business it does in China relates to consumer devices, which are not part of the curbs. The government is concerned about Chinese use of advanced technology in intelligent weapons, which has prompted the decision.
TSM management said on the call that the company has also obtained an extension of one year on its Nanjing facility. Therefore, there won’t be much of an impact on its business at all.
It is the semiconductor equipment makers that will be severely affected because they generate a sizeable amount of their businesses from China, which is gearing up to becoming self-reliant in chips and the leader in AI technology. Applied Materials (AMAT - Free Report) has already taken down its guidance while KLA Corp (KLAC - Free Report) and Lam Research (LRCX - Free Report) are weighing their options in China and ASML cutting services to Chinese customers [Bloomberg reports].
For Taiwan Semiconductor, which reported stellar results in the last quarter, including an 80% increase in profits and 36% increase in revenue, the concern is only partly related to U.S. directives. The 10% reduction in its capex to $36 billion from the July estimate of $40 billion (which was also lowered from $40-44 billion) is not a reflection of the curbs. Management has said that half of it is related to supply chain concerns that are stretching out delivery of tools. The other half is the result of capacity optimization in anticipation of slowing demand next year.
So the main take from management commentary and the read-through to other semiconductor stocks is that demand will soften in 2023, as a result of a softer computing/consumer market (items that were overbought during the pandemic), as well as relatively soft demand for enterprise and commercial PCs as a result of an economy rendered sluggish by the Fed’s tightening actions. The auto market is still going strong, but there has been recent conversation about oversupply next year. Definitely not a good sign for semiconductor suppliers.
Most semiconductor stocks are therefore in the bottom 50% of Zacks-ranked industries, which means that you shouldn’t expect the stocks included in them to have a good chance of upside in the near term. No matter what their concerns. Therefore, these stocks are best avoided for now.
One-Month Price Performance
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Taiwan Semiconductor Shares Rise on Hopes of Lower Fallout from U.S. Curbs
At a time when the global chip industry was reeling from the post-pandemic pullback in demand, the Biden administration announced restrictions on their trading with China. Chipmakers were expecting such an announcement for months, but the actual event is having the expected impact on share prices.
Not all chipmakers will be affected the same however. Companies like Intel (INTC - Free Report) , which is reportedly considering headcount reductions will be affected. And Taiwan Semiconductor (TSM - Free Report) , which generated 8% of its revenue from China in the last quarter will also be affected, but to a lesser extent.
In fact, most of the business it does in China relates to consumer devices, which are not part of the curbs. The government is concerned about Chinese use of advanced technology in intelligent weapons, which has prompted the decision.
TSM management said on the call that the company has also obtained an extension of one year on its Nanjing facility. Therefore, there won’t be much of an impact on its business at all.
It is the semiconductor equipment makers that will be severely affected because they generate a sizeable amount of their businesses from China, which is gearing up to becoming self-reliant in chips and the leader in AI technology. Applied Materials (AMAT - Free Report) has already taken down its guidance while KLA Corp (KLAC - Free Report) and Lam Research (LRCX - Free Report) are weighing their options in China and ASML cutting services to Chinese customers [Bloomberg reports].
For Taiwan Semiconductor, which reported stellar results in the last quarter, including an 80% increase in profits and 36% increase in revenue, the concern is only partly related to U.S. directives. The 10% reduction in its capex to $36 billion from the July estimate of $40 billion (which was also lowered from $40-44 billion) is not a reflection of the curbs. Management has said that half of it is related to supply chain concerns that are stretching out delivery of tools. The other half is the result of capacity optimization in anticipation of slowing demand next year.
So the main take from management commentary and the read-through to other semiconductor stocks is that demand will soften in 2023, as a result of a softer computing/consumer market (items that were overbought during the pandemic), as well as relatively soft demand for enterprise and commercial PCs as a result of an economy rendered sluggish by the Fed’s tightening actions. The auto market is still going strong, but there has been recent conversation about oversupply next year. Definitely not a good sign for semiconductor suppliers.
Most semiconductor stocks are therefore in the bottom 50% of Zacks-ranked industries, which means that you shouldn’t expect the stocks included in them to have a good chance of upside in the near term. No matter what their concerns. Therefore, these stocks are best avoided for now.
One-Month Price Performance
Image Source: Zacks Investment Research