Taiwan Semiconductor Mfg. Co. Ltd. (2330 TT) reported muted first quarter results due to a combination of depreciation of new Taiwanese Dollars against U.S. dollars and seasonal weakness in mobile products. After stellar top-line growth in 2016, we anticipate 2017 will be more challenging from both growth and profitability perspectives. This appears to be playing out so far, though we do forecast the second half of 2017 to be stronger than the first as TSMC’s 10-nanometer products ramp in support of Apple Inc (AAPL US)’s latest iPhones. Nonetheless, we think TSMC will be susceptible to a steep learning curve for the process, via weaker margins due to low yields during initial production stages. Subsequently, we also note the possibility for delayed products that are unable to secure sufficient supply of 10-nm chips. Shares were modestly lower in trading after the earnings release, as Guidance fell below estimates (both ours and the Street’s).
Management expects second-quarter revenue to decline 8% sequentially in new Taiwan dollar terms, or 6% in U.S. dollar terms. Additionally, the firm now forecasts overall foundry market growth of 5%, down from 7% previously. We think the aforementioned challenges related to the 10-nm process could reduce this target further. With Intel Corp (INTC US) increasingly eyeing the foundry space to leverage unused manufacturing capacity, we believe TSMC’s dominance in contract chip manufacturing will be challenged over the next few years. Consequently, TSMC shares are overvalued in our view, as current prices imply the status quo will persist.
Analyst: Abhinav Davuluri
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