Taiwan's AI and Semiconductor Industry: Navigating Funding Cuts and Maintaining Competitiveness

If you're an investor keeping a close eye on the global semiconductor and AI landscape, it's highly likely that you've considered Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) or TSMC as a potential investment. As the world's leading pure-play foundry, TSMC plays a crucial role in our daily lives, with companies like Apple (AAPL), Nvidia (NVDA), Broadcom (AVGO), Qualcomm (QCOM), and AMD (AMD) relying on it to fabricate their chips. These are the top semiconductor design companies that drive the value chain, whether for consumer electronics or data centers. Given this context, it's intriguing that TSMC's valuations remain attractive relative to its peers and historical averages, despite its leadership and dominance. As of now, TSM last traded at a forward EBITDA multiple of 9.5x, below its semi-peers' median of 11.4x (according to S&P Cap IQ data). It's also just ahead of its 10Y average of 8.3x but well below its overvalued highs in 2021. This suggests that the market's caution is likely due to overstated fears, particularly regarding geopolitical risks over Taiwan.



While I understand that geopolitical risks over Taiwan could explain the market's caution, the significant discount reflected against its peers is likely overstated. In the near term, TSMC is not expected to see a substantial revenue growth inflection from AI chips. JPMorgan (JPM) estimates that AI revenue could account for just 5% of its topline this year, but could increase to 10% by 2026. This could explain why investors haven't gotten too excited over an aggressive buy thesis in TSM. They are likely still pricing in the malaise over consumer electronics and the ongoing slowdown in data center growth momentum.



The revised analysts' estimates indicate that TSMC's revenue growth could bottom out in Q3 with a 12.2% YoY decline. Things should start improving subsequently, as analysts expect TSMC to post a revenue decline of 5.2% for FY23. In addition, its gross margin profile is also expected to bottom out in Q2/Q3 before reverting higher. I don't expect TSM to revisit the lows it last saw in October 2022, when investors sent it to levels not seen since June 2020. As such, I anticipate that TSMC is well-primed to navigate the secular growth drivers in high-performance computing (HPC) and bolstered by the recovery in consumer electronics after a difficult year.

AI and automotive revenue should continue to underpin TSMC's operating leverage, keeping its utilization high and sustaining its margin profile. Assessing TSMC's FY25 EBITDA multiple of 6.8x, I'm increasingly confident that the market has yet to price in the optimism over its potential multi-year recovery. With TSM moving back into a long-term uptrend, it should support momentum buying sentiments as these investors return, feeling more confident about its upward bias.



TSM has also resumed its medium-term uptrend, suggesting that dip buyers have continued to support steep selloffs. Notwithstanding, I identify a possible resistance zone at the $110 level, which could hamper further upside unless momentum investors muster sufficient conviction to overcome that zone. However, a further fall back into the $80 levels (April lows) seems unlikely, given the prevailing upward momentum. As such, I see the current consolidation constructively and am optimistic that momentum and breakout buyers could subsequently overcome the $110 level.

With TSM still priced reasonably and having moved decisively back into an uptrend, I now expect further upside moving ahead. Near-term pullbacks should be exploited aggressively as dip-buying opportunities in a prevailing uptrend.

Rating: Strong Buy (Revised from Buy).

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

Taiwan's Science Ministry Warns: Spending Cuts Could Impact Chips, AI Funding

Taiwan's science ministry has recently warned that spending cuts could have a significant impact on the country's semiconductor and AI industries. The ministry's concerns are well-founded, given the crucial role these sectors play in Taiwan's economy and global competitiveness. In this article, we will explore the potential consequences of reduced funding on Taiwan's AI and semiconductor industries, with a particular focus on Taiwan Semiconductor Manufacturing Company (TSMC), the world's leading pure-play foundry.

Taiwan's AI and Semiconductor Industry: A Global Powerhouse

Taiwan's AI and semiconductor industries have long been recognized as global leaders, with TSMC at the forefront of the foundry market. The company's advanced chip manufacturing capabilities and technological leadership have made it an essential partner for many of the world's top semiconductor design companies, including Apple, Nvidia, Broadcom, Qualcomm, and AMD. These companies rely on TSMC to fabricate their chips, which are used in a wide range of consumer electronics and data center applications.

Potential Consequences of Reduced Funding

If reduced funding impacts Taiwan's AI and semiconductor industries, the consequences could be severe. Some potential impacts include:

1. Slower Innovation and Competitiveness: Reduced funding could lead to a slowdown in research and development, making it more difficult for companies like TSMC to maintain their technological edge. This could result in a loss of competitiveness in the global market, as other countries and companies invest more in AI and semiconductor technologies.
2. Brain Drain: If funding cuts lead to a deterioration in working conditions, salaries, or career prospects, there is a risk of a brain drain, where top talent leaves Taiwan to seek better opportunities elsewhere. This could further exacerbate the challenges faced by companies like TSMC in attracting and retaining top talent.
3. Economic Implications: The AI and semiconductor industries are significant contributors to Taiwan's economy. Any slowdown in these sectors due to reduced funding could have broader economic implications, including job losses and reduced GDP growth.

TSMC: Navigating Funding Cuts and Maintaining Competitiveness

As the world's leading pure-play foundry, TSMC is well-positioned to navigate the challenges posed by reduced funding. The company's strong financial performance and technological leadership have allowed it to maintain its competitive edge in the face of geopolitical risks and market fluctuations. However, TSMC is not immune to the potential impacts of reduced funding on its ability to invest in research and development, upgrade facilities, and attract top talent.

To mitigate the effects of reduced funding, TSMC can explore several strategies:

1. International Collaboration: TSMC can collaborate with international partners to share resources, expertise, and best practices in AI and semiconductor development. This could help the company maintain its technological leadership and attract top talent from around the world.
2. Government Incentives: TSMC can work with the Taiwanese government to secure incentives and support for its research and development efforts. This could help offset the impact of reduced funding and ensure that the company remains competitive in the global market.
3. Diversification: TSMC can diversify its revenue streams by expanding into new markets and applications. This could help the company maintain its financial stability and mitigate the impact of reduced funding in any single area.

Conclusion

In conclusion, reduced funding could have a significant impact on Taiwan's AI and semiconductor industries, with potential consequences for the country's competitiveness, economic growth, and technological leadership. However, companies like TSMC are well-positioned to navigate these challenges and maintain their competitive edge through international collaboration, government incentives, and diversification. As investors, it is essential to monitor the situation closely and make informed decisions based on the latest developments in the market.