Unfazed by the record-breaking plunge, Morgan Stanley lists Taiwan Semiconductor as its top pick, stating that the valuation is attractive after the sell-off
Morgan Stanley analysts are optimistic about the quality and defensiveness of Taiwan Semiconductor, stating that price increases and continued strong AI capital expenditures are key catalysts for the stock. On Monday, Taiwan Semiconductor's stock price in Taiwan fell by nearly 10%, with its US stock initially dropping by nearly 11%, but closing down by only 1.3%. After-hours trading saw a turnaround with an increase of nearly 2%
Despite Taiwan Semiconductor's recent record-breaking plunge, Morgan Stanley remains optimistic.
In its latest report, Morgan Stanley analysts have listed Taiwan Semiconductor as their top pick, believing that the stock's valuation is attractive after a recent period of weak performance. Analyst Charlie Chan from Morgan Stanley wrote in the report, "We are bullish on the quality and defensiveness of Taiwan Semiconductor in the long-term semiconductor downturn cycle." He also pointed out, "Confirmation of price increases and continued strength in artificial intelligence (AI) capital expenditure should be key catalysts for Taiwan Semiconductor."
Chan expects that with price increases, "Taiwan Semiconductor should achieve a gross margin of over 55% by 2025, and gradually approach a gross margin level close to 60% between 2028 and 2030 after achieving economies of scale in overseas wafer fabs."
On the day Morgan Stanley issued the positive report on Taiwan Semiconductor, the stock price of Taiwan Semiconductor listed in Taipei, China, plummeted by nearly 9.8% on Monday this week, marking the largest single-day decline since its listing. As Taiwan Semiconductor and other leading stocks plunged, all sectors of the Taiwan stock market collapsed on the same day, with the Taiwan Stock Exchange Weighted Index falling by 8.4%, also marking the largest single-day decline on record.
The Taiwan Stock Exchange held a press conference on Monday afternoon to explain recent market movements and response measures. The Taiwan Stock Exchange stated that stabilizing market measures will be taken if necessary. So far, there is no need to introduce market stabilization measures. The fundamentals of the Taiwan stock market remain strong.
In contrast to the sharp drop in stock prices in Taiwan, the American depositary receipts (ADRs) of Taiwan Semiconductor listed on the New York Stock Exchange showed a significant easing of decline on Monday, initially falling by about 10.9%, but ultimately closing down by nearly 1.3%, with a post-market rally of nearly 2%.
Moore Securities Investment Consulting analyst Adam Lin commented that judging from the decline in Taiwan Semiconductor's stock price, investors on Monday were indiscriminately eager to sell off, ignoring the company's strong fundamentals. Lin mentioned that last Friday, the Tokyo stock market plummeted by 12.40% and the Seoul stock market by 8.7%, stating, "They (investors) were just scared by the systemic risks, as the weakness in the U.S. market triggered selling in the region." In addition, Monday's regional sell-off also reflected heightened tensions in the Middle East.
Over two weeks ago, Taiwan Semiconductor announced that its second-quarter sales, net profit, and gross margin were all higher than expected, with net revenue for the quarter exceeding expectations with a year-on-year growth of 40.1%, net profit exceeding expectations with a growth of 36.3%, and a gross margin of 53.2%, higher than Taiwan Semiconductor's entire guidance range of 51%-53% and higher than analysts' expectations of 52.6%. Taiwan Semiconductor also raised its sales guidance for the year, increasing the expected sales growth in U.S. dollars for the full year to above the mid-range of 20%, revised from the range of 21%-26% to 24%-26% Taiwan Semiconductor's growth is mainly driven by strong demand in the AI and high-performance computing sectors in recent times. In the second quarter, Taiwan Semiconductor's AI chip manufacturing business continued its strong momentum, while the steady recovery of the smartphone business was boosted by an increase in iPhone shipments. Revenue from the HPC (High-Performance Computing) platform accounted for the highest proportion at 52%, a significant increase of 28% compared to the previous period; smartphone business revenue accounted for 33%, automotive business 5%, IoT 6%, and DCE business 2%.
When announcing its second-quarter financial report, Taiwan Semiconductor also raised the lower limit of its full-year capital expenditure guidance, expecting full-year capital expenditure to be between $30 billion and $32 billion, the entire guidance range higher than the market's estimate of $29.55 billion, previously guided at $28 billion to $32 billion.
During the earnings conference call, Taiwan Semiconductor's Chairman and CEO Wei Zhejia stated that the reason for raising the lower limit of the full-year capital expenditure guidance is mainly due to higher growth opportunities. The revenue exceeding guidance this quarter was mainly benefited from the demand for the N3 and N5 processes. Wei Zhejia also pointed out that in the past three months, strong demand in AI and smartphones supported the growth, and it is expected that the 5-nanometer process will maintain a high level in the second half of the year. It is expected that this year will be a "very strong growth year for us, with revenue growth slightly exceeding the mid-range of 20% in US dollars."