What happened
Shares of Taiwan Semiconductor Manufacturing (TSM 0.60%) fell 7.6% in October, according to data from S&P Global Market Intelligence. That was in contrast with the broader S&P 500 index, which was up 8% during the month.
Taiwan Semiconductor, the largest pure-play foundry in the world, actually reported a good quarter later in the month. However, management did warn that some of its end markets were softening. In addition, the U.S. government announced a harsher-than-expected ban on advanced semiconductor sales to China, hurting sentiment around every semiconductor company involved in leading-edge chip production.
So what
In early October, the Biden administration doubled down on restrictions of advanced chips to China, some of which had been announced earlier this summer.
When the ban went into effect, it was ironically the most advanced semiconductor companies with arguably the highest-quality businesses that sold off the most. Taiwan Semiconductor has the lead in advanced process technology for producing leading-edge semiconductors, so if sales of advanced chips are cut off to China, that potentially means fewer sales for Taiwan Semi's chip design customers.
On its third-quarter conference call later in the month, management called the effect of the ban "limited and manageable." Yet given concerns over a cyclical downturn in the economy, investors were in an unforgiving mood.
This is despite Taiwan Semi reporting better-than-expected revenue and earnings in the third quarter, with revenue up 35.9% over the prior year, and operating margin expanding by a whopping 9.4 percentage points.
However, management guided for only flattish quarter-to-quarter revenue in the fourth quarter, despite its leading competitive position. Management noted the headwinds of the semiconductor cyclical slowdown counteracting high demand for TSM's industry-leading 5 nm technologies. Management also said it would slightly moderate its capital expenditures this year, lowering its spending relative to prior forecasts, hinting at a further slowdown in the year ahead.
Now what
Despite its robust third quarter and solid competitive advantage, Taiwan Semiconductor showed it isn't immune from the valuation compression of rising interest rates and the broader global slowdown.
Additionally, China's recent saber-rattling regarding Taiwan isn't helping matters. The China National People's Congress was held late in the October, during which President Xi Jinping stacked the new Politburo with loyalists, who tend to be hawks regarding "reunifying" with Taiwan.
Given the myriad problems China is dealing with, the hawkish-toned Communist Party conference probably didn't help sentiment around Taiwan Semi either. That being said, Taiwan Semi does look awfully cheap these days, at just a 13 price-to-earnings ratio and a growing dividend of 3%.
