Taiwan Semiconductor Just Wrapped Up a Rough Third Quarter -- Is It Time to Buy the Dip?

For the better part of three years now, Taiwan Semiconductor Manufacturing (TSM 2.37%) has largely been dead money. The market sold off TSMC from its highs during the pandemic-fueled digital economy boom, even though this business continued to chug higher. However, a long-feared downturn already plaguing consumer electronics starting in late 2022 has come for TSMC, too. The company reported significant sales declines through the summer months. 

Nevertheless, management has expressed its expectation that AI chips will help lift the company to new highs in 2024. So is it time to buy the stock while it's still down?

A rough third quarter brings epic growth to an end

Q2 2023 sales at TSMC declined a modest 6.2% (after converting from Taiwanese dollars to U.S. dollars). Management predicted the downturn would worsen in Q3, causing the first full-year revenue decline in quite some time for the chipmaking giant. 

Data by YCharts.

The final quarterly report hasn't been compiled yet, but Q3 earnings will likely see an even worse downturn for TSMC. The company gives monthly updates to its semiconductor manufacturing empire, and the trend has been down the last three months. 

Currency exchange rate as of Oct. 9, 2023. Data source: Taiwan Semiconductor Manufacturing.

With such performance now in the books, TSMC's estimate for about a 10% full-year sales downturn now seems assured. Earnings per share are also likely to decrease by a slightly steeper amount as TSMC loses some manufacturing efficiency with lower activity on its production lines. It seems that leading generative AI systems from customer Nvidia can only do so much to offset weakness elsewhere, and the same goes for the hype surrounding top customers like Apple with its iPhone 15 and other latest gadget refreshes.

Chip stock deep value, or value trap?

Things are looking ugly at TSMC, and there's at least one more quarter of downturn left to go. The market is hyper aware of this, and has driven the stock down to just 15 times trailing 12-month earnings -- which, of course, doesn't yet include what will surely be a sizable year-over-year earnings decline in the third quarter. Share price volatility could still lay ahead. 

Nevertheless, TSMC could be really cheap right now if we look beyond this immediate downturn. After all, if you believe management, revenue growth will average a double-digit percentage in the coming years off of 2023 revenue, driven by an expected average 50%-per-year AI market. Surely, a multiple of 15 times earnings is cheap.

At some point, perhaps in 2024, other parts of the chip market will also rebound. New manufacturing technologies like advanced packaging are also gearing up at TSMC and should provide impetus for customers to ratchet up IT sales activity once again (better chips drive down long-term computing costs and unlock new computing uses). 

The other factor, of course, is TSMC's geopolitical risk. This is often cited and discussed, but it's largely unknown at this point if China will ever indeed make a move on Taiwan that would disrupt the world's semiconductor lifeline. 

At this point, I continue to think TSMC is a pretty darn good value for long-term-minded investors. The market may continue to snub the top semiconductor stock until it sniffs out the next uptick in sales. For the patient, though, it's time to keep a close eye on Taiwan Semiconductor.