Symbol: TSM.
Taiwan Semiconductor
Key points:
- Taiwan Semiconductor Manufacturing (TSM.TW; 2330:TW; ADR: TSM) reported strong Q2 numbers after market close in Taiwan. Guidance for the next quarter was higher than expected, and the company raised its 2020 revenue outlook.
- On the daily chart, the stock broke out of a cup base on July 6 and is slightly extended from a proper entry point (pivot TWD 346 or $60.64 for the ADR). We recommend accumulating shares on any pullback.
- TSM has a high RS Rating of 87, A/D Rating of B+, and Up/Down Volume Ratio of 1.8.
- Fundamentals are also strong: EPS Rank of 90 and SMR Rating of A.
- Demand for high performance computing and 5G chips is driving growth at TSMC.
- Demand from the HPC market is positive for Advanced Micro Devices (AMD) and Nvidia (NVDA).
- Ramping 5G demand is positive for companies like Apple (AAPL), Qualcomm (QCOM), Mediatek (MDT.TW), Marvell (MRVL), Qorvo (QRVO), and Skyworks (SWKS). In the report is an annotated datagraph for Skyworks (SWKS), a 5G chip designer with strong technical ratings and that is setting up ahead of earnings.
- For 2020, the company expects capex of $16B–17B, up from $15B–16B.
Semiconductor Industry
Key points from this report:
- Although the newly introduced rules by the U.S. Department of Commerce create uncertainty among the entire semiconductor industry, most of the burden of dealing with the new rules is likely to fall on Taiwan Semiconductor Co. (TSMC; ADR ticker: TSM) and other foundries that serve Huawei and its affiliates. We will monitor the situation and update clients as things unfold.
- Huawei has a long list of U.S.-based suppliers. We believe that companies that supply 5G-related products are the most at risk. U.S. semiconductor companies that may be impacted either directly or indirectly include NeoPhotonics (NPTN), Lumentum (LITE), Qorvo (QRVO), IIV-I (IIVI), Skyworks (SWKS), Broadcom (AVGO), and Qualcomm (QCOM).
- Semiconductor equipment companies are subject to the new rules and could also be negatively impacted directly or indirectly. Companies that we will be closely monitoring include Applied Materials (AMAT), KLA (KLAC), Lam Research (LRCX), and ASML Holdings (ASML).
- Taiwan Semiconductor Co. is a major producer of chips for Huawei’s HiSilicon unit. Because of this relationship with Huawei, TSMC is subject to the new rules from BIS and will have to apply for a license. In fact, the Taiwanese company has already stopped taking new orders from Huawei, according to various reports that were published last night. This would not only have negative implications for TSMC itself, but for the entire supply chain. In 2019, Huawei and its affiliates accounted for 14% of TSMC’s total revenue. On Friday, May 15, shares broke below support at the 200-DMA ($51.14) on above average volume. We believe TSMC shares are likely to enter a period of consolidation or base formation near the 200-DMA.
- China may retaliate by shutting U.S. tech companies out of the Chinese market if the U.S. government moves forward with the plan to block companies like TSMC from fabricating semiconductors for Huawei. Measures would include putting U.S. companies on an “unreliable entity list,” unveiling investigations and imposing restrictions on U.S. tech companies like Apple (AAPL), Cisco (CSCO), and Qualcomm (QCOM).
Large-Cap Secular Growth
In light of the heightened economic uncertainty, our analyst team has compiled in the attached report a multi-sector list of companies that we believe can perform well through market cycles. These companies benefit from secular growth trends, are leaders in their respective industries, and have business models that we expect to be resilient through a challenging period for the econom
Semiconductor Update — Cycle Peak or Seasonal Bump?
What’s New
Yesterday, Texas Instruments ( TXN ) reported in-line Q4 2017 results, marking the first quarter since Q2 2016 that revenues were not at the high-end of the guided range. Revenue growth of 10% y/y was the slowest growth rate in four quarters due to softer demand for chips used in communication equipment applications. The highlight of the quarter was strong demand for semiconductor products used in the Automotive industry, which represents close to 20% of TXN’s annual revenue. In Q1 2018, TXN expects revenue growth to slow to 7% y/y, based on the mid-point of the Company’s guidance.
TXN was down 8% today.
Today, Korean media reported that Apple’s “highly hyped” iPhone X is struggling to attract local consumers due to its high price. The iPhone X is Apple’s most expensive handset ever. The 64GB model costs KRW 1.3M ($1,200) and the 256GB units sells for KRW 1.5M ($1,400). Admittedly, the iPhone X did have a solid start. Sales of the iPhone X hit 100,000 units in the first two days of sales, but have sharply slowed to 2,000-3,000 per day. The recent “batterygate” scandal was also cited as a reason for the lower-than-expected demand for the handset. There are fears that due to sluggish sales, Apple will retire the device this summer. News of softer-than-expected iPhone X sales is putting pressure on Apple suppliers like Skyworks ( SWKS ), Lumentum ( LITE ), Cirrus Logic ( CRUS ), Qorvo ( QRVO ), AMS ( AMS.CH ), and Focus List-rated Broadcom ( AVGO ).
US Focus Long
U.S. indices traded flat again this week, still able to catch support at the lower end of a range,
but also unable to break higher. This continues to be a stock pickers type market, with a select
number of leadership ideas working well, while the majority continue to trade in tandem
with the major averages. We continue to recommend focusing on those ideas that have been
rallying, trading with little to no overhead supply, a high relative strength rating, and making
higher highs despite the sideways market. The market remains in a Confirmed Uptrend
despite being range bound, with now only three distribution days on the NASDAQ and four
on the S&P 500.
US Focus Long
U.S. indices were able to trade back up into new highs this week following positive earnings
results from major index components. The NASDAQ clearly broke through resistance, while
the S&P 500 is still hitting the top of a two-month range at 2120. The majority of ideas
on our U.S. Focus List that reported this week reacted positive to earnings, gapping up or
moving higher off areas of support. Additionally, a further rise in the market over the next
few days will result in multiple distribution days being erased from the current count (5 on
the S&P, 6 on the NASDAQ). Earnings continue to serve as the most significant factor going
forward, with 22 of our 69 ideas set to report next week. The market has been moved back
into a confirmed uptrend, and is now up 9% on the S&P 500 and 15% on NASDAQ since
the October 21 follow-through day.
US Focus Long
The S&P 500 and NASDAQ traded relatively flat during a holiday shortened week,
although market wide distribution remains a concern (8+ days). Almost all of the USFL
recommendations have pulled back into areas of consolidation and remain intact, exhibiting
a bent but not broken trait. This quality will be tested as we move into earnings season in the
coming weeks, as Q1 earnings for the S&P 500 are expected to decline by 4.6%. With the
market condition under pressure, we recommend caution on any new buys, as the NASDAQ
sits on its 50-day MA while the S&P 500 trades slightly below its respective moving average.
US Focus Long
The market moved back into new highs this week, rising two weeks in a row for the first
time since December. Volatility has decreased, as the averages have tightened up and are
trading constructively for the first time this year. Multiple distribution days have also fallen
off, while new ideas have been rapidly emerging each day. These positive signals lead us to
recommend buying or adding to our fundamentally strong ideas as they move higher off
areas of support. The market is in a confirmed uptrend, now up 8-10% since the followthrough
day on October 21, 2014.
