Taiwan Semiconductor Manufacturing reported strong fourth-quarter results, bolstered by chips for Apple’s iPhone 7 and Nvidia’s latest graphics processing units. While Tsmc exhibited meaningful double-digit revenue growth in 2016, we expect 2017 to be more challenging from both growth and profitability perspectives. We forecast slowing smartphone growth attributed to greater saturation and longer replacement cycles, partially offset by greater silicon content across all devices. TSMC’s upcoming 10-nanometer process will most likely face a steep learning curve with low yields during initial production stages, thus hampering margins.

Shares were down slightly in trading after the earnings release due to a modest forward guidance but continue to trade at a premium to our unchanged fair value estimate of $24 per ADR. We recommend investors seek a more attractive entry point for this narrow-moat foundry leader.

Analyst: Abhinav Davulur

This insight is part of Smartkarma. For more follow this link.