Taiwan Semiconductor Manufacturing's (TSM 1.00%) stock price jumped 6% on Jan. 12 after the world's largest contract chipmaker posted its fourth-quarter report. Its revenue rose 43% year over year to NT$625.5 billion ($19.9 billion), but missed analysts' expectations by NT$10.5 billion ($345 million) and marked its first quarterly top-line miss in two years. Its net income jumped 78% to NT$295.9 billion ($9.4 billion), or $1.82 per American Depositary Receipt (ADR), and still beat analysts' estimates by a nickel.
TSMC's headline numbers were mixed, but its stock had already declined by more than 30% over the past 12 months as investors fretted over the slowing growth of the semiconductor sector. At 15 times forward earnings, its downside potential also seemed fairly limited ahead of its Q4 report. So should investors buy TSMC's stock right now?
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Why will TSMC's growth cool off in 2023?
TSMC generated 41% and 39% of its revenues from the high-performance computing (HPC) and smartphone markets, respectively, in 2022. Its top HPC clients include Advanced Micro Devices (AMD 2.73%) and Nvidia (NVDA 5.44%), while its top smartphone clients include Apple (AAPL 0.45%) and Qualcomm (QCOM 1.40%).
AMD and Nvidia experienced big growth spurts during the worst of the pandemic as more people upgraded their PCs for online classes, remote work, and high-end gaming, but those tailwinds dissipated after the lockdowns ended. Apple and Qualcomm benefited from the 5G upgrade cycle from 2019 to 2021, but the end of that cycle -- along with inflationary headwinds and the COVID-19 lockdowns in China -- have curbed the market's appetite for new smartphones.
TSMC's revenue rose 43% in 2022 (34% in USD terms), but analysts anticipate less than 4% growth in 2023 as its two growth engines cool off. Its automotive and Internet of Things (IoT) businesses could continue to grow this year, but those two smaller segments only accounted for 14% of its revenues in 2022.
During the conference call, TSMC CEO C.C. Wei predicted the entire semiconductor market, excluding memory chips, would "decline approximately 4%" in 2023. However, Wei also expects the semiconductor cycle to "bottom" in the first half of the year and recover in the second half -- which suggests the industry will return to growth in 2024.
Will TSMC maintain the process lead this year?
TSMC might face a cyclical slowdown this year, but it remains far ahead of its closest rivals, Samsung and Intel (INTC -9.46%), in the "process race" to manufacture smaller, denser, and more power-efficient chips.
TSMC generated 26% of its revenue from its top-tier 5nm chips in 2022, and 27% came from its 7nm chips. The remaining 47% came from its older nodes. It will likely generate even more revenue from the 5nm node this year as it ramps up the production of its newest 3nm chips, which are expected to account for a "mid-single-digit" percentage of its 2023 revenue.
That roadmap still puts it at least two generations ahead of Intel, which previously claimed it could catch up to TSMC in the process race by 2024, and about one generation ahead of Samsung. During the peak of the chip shortage a year ago, TSMC said it would boost its capex to $40 billion to $44 billion in 2022 to maintain that lead and produce more chips.
But TSMC actually only spent $36.3 billion on capex for the full year, and it expects that figure to decline to $32 billion to $36 billion in 2023. That lower spending outlook indicates that chip supplies are stabilizing as TSMC remains comfortably ahead of Intel and Samsung in the process race. By comparison, Intel expects to spend $21 billion on its capex in 2022.
Analysts expect TSMC's net income to decline 15% in 2023 as it ramps up its production of 3nm chips and prepares for the leap to 2nm chips in 2025, but its lower capex might reduce some of the near-term pressure on its margins.
Is it the right time to buy TSMC?
TSMC's gains in the first half of 2023 might be limited as the bear market drags on, but it could bounce back in the second half as the smartphone and HPC markets heat up again. Therefore, I believe TSMC is still a solid investment in the semiconductor sector -- and it's definitely the right time for long-term investors to buy the stock.
