Taiwan Semiconductor Manufacturing's (TSM 4.23%) stock has slipped nearly 10% over the past three months as investors fretted over the contract chipmaker's slowing growth. Its revenue has declined year over year for two consecutive quarters, and it's bracing for another drop in the third quarter and a 10% revenue decline in USD terms for the full year.
TSMC still makes the world's smallest and densest chips, but its growth stalled out as consumers bought fewer PCs and smartphones after the end of the COVID-19 public health emergency. The macro headwinds curbed the market's appetite for other types of chips.
Image source: TSMC.
That's why the bears argue that TSMC still can't be considered a bargain at 16 times forward earnings. But if you take a closer look at the recent headlines about TSMC, you'll spot four green flags that suggest brighter days might be ahead.
1. Taiwan's latest trade figures
On Oct. 11, Taiwan's Ministry of Finance released its September trade numbers. Its overall exports rose 3.4% to $38.81 billion. But within that total, its exports of information, communication, and audio/video products grew 59.8% to $8.25 billion.
The semiconductor sector, which accounts for about 15% of Taiwan's gross domestic product, likely drove most of that growth. And since TSMC is Taiwan's largest semiconductor company by a mile, the Ministry of Finance's latest numbers imply it's still producing plenty of chips for its top overseas customers like Apple and Nvidia.
2. An anticipated jump in AI chip sales
Nvidia's sales of data center chips have skyrocketed this year as companies installed more of its high-end GPUs to process artificial intelligence (AI) and machine learning tasks. The explosive growth of that market, which has largely been driven by popular generative AI platforms like OpenAI's ChatGPT and DALL-E, could also light a blazing fire under TSMC's business.
Alicia Garcia-Herrero, Natixis' chief economist for the Asia-Pacific region, recently said the market's "huge demand for AI chips" will likely drive the growth of Taiwan's semiconductor sector.
During the company's latest conference call in late July, TSMC CEO C. C. Wei predicted its production of AI-related server chips would climb from "approximately 6%" of its revenue today to a "low teens" percentage over the next five years. Wei also expects that niche to grow at a compound annual growth rate (CAGR) of 50% during that period.
NYSE: TSM
Key Data Points
3. A possible waiver for its chip sales to China
The tech war between the U.S. and China is generating unpredictable headwinds for TSMC. The U.S. barred TSMC from producing chips for Huawei in 2020, and it blocked it from exporting advanced chipmaking technologies to China last October. However, TSMC, Samsung, and SK Hynix received one-year waivers from those new export curbs.
The Biden administration recently extended those waivers indefinitely for Samsung and SK Hynix, which strongly suggests TSMC will also receive a similar reprieve. The U.S. already previously said TSMC could maintain its current operations in China as long as it didn't significantly upgrade those plants -- which shouldn't be a problem, since it's only been producing older chips at its two Chinese fabs in Shanghai and Nanjing.
4. The chip cycle is bottoming out
Finally, there are clear signs that TSMC has reached its cyclical trough. It expects its revenue to rise 6.5% to 11.6% sequentially in the third quarter and finally end its three-quarter streak of sequential declines.
Moreover, many of the major chipmakers -- including Intel, Advanced Micro Devices, Micron, and Texas Instruments -- have posted sequential improvements in their latest quarters. That stabilization suggests that brighter days could be ahead for TSMC.
Do these green flags make TSMC a worthy investment?
TSMC's stock might remain out of favor in this choppy market, but I believe it's still one of the best long-term plays on the secular growth of the semiconductor sector. Therefore, these four green flags suggest it's the right time to buy TSMC -- since its growth will inevitably accelerate again once the macro environment improves.
