Taiwan Semiconductor Manufacturing Company (NYSE:TSM), commonly known as TSMC, is scheduled to release its Q3 financial results on October 19. The ongoing weakness in end-market demand and higher utility expenses in Taiwan suggest that the world’s biggest chip maker’s earnings could continue to decline. Let’s delve deeper.
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TSMC – Q3 Expectations
Analysts expect TSMC to post revenue of $16.97 billion in the third quarter of 2023. This compares unfavorably to the prior-year quarter’s revenue of $20.16 billion. Challenging macroeconomic conditions have contributed to a decrease in end-market demand, exerting pressure on TSMC’s overall revenue. Further, industry-wide inventory issues remain a drag.
While its top line is expected to decline year-over-year, TSMC’s financial performance may exhibit a sequential uptick, driven by an upswing in demand for AI (Artificial Intelligence)-related products. In a note to investors dated October 16, TD Cowen analyst Krish Sankar said he expects “iPhone and PC seasonality and AI accelerator demand to drive year-end demand” for TSM. The analyst reiterated a Hold recommendation on Taiwan Semiconductor stock. However, he expects the company to beat analysts’ consensus estimates for sales in Q3.
A year-over-year decline in sales, higher electricity costs, and an overall inflationary environment will likely weigh on TSMC’s bottom line. However, its earnings could show sequential improvement based on stringent cost control measures and a quarter-over-quarter improvement in capacity utilization rate.
Analysts expect TSM to post earnings of $1.16 a share in Q3, much lower than the EPS of $1.70 in the prior-year quarter. However, the consensus estimate indicates a sequential improvement in the bottom line. In the previous quarter, TSMC delivered earnings of $1.13 per ADR (American Depositary Receipt).
Given this backdrop, let’s look at what the Street recommends for TSM stock ahead of Q3 earnings.
Is TSM Stock a Buy or Sell?
Wall Street analysts maintain a bullish outlook on TSM stock ahead of the Q3 print. The AI-led opportunity, cost savings measures, and an expected rebound in demand in the coming quarters keep analysts optimistic.
TSM stock sports a Strong Buy consensus rating based on seven Buy and two Hold recommendations. Analysts’ average price target of $122.50 implies 34.29% upside potential from current levels.
Insights from Options Trading Activity
While analysts are bullish about TSM stock, options traders are pricing in a +/- 4.53% move on earnings, lower than the previous quarter’s earnings-related move of -5.05%.
Bottom Line
Though TSMC faces short-term headwinds, its long-term prospects remain bright. The AI-led demand, its continued investment in research and development, and its focus on cost reduction augur well for future growth. This is well reflected in analysts’ Strong Buy consensus rating.
