Taiwan Semiconductor Q4 preview: Where next for TSM stock?

When will TSMC release Q4 earnings?

Taiwan Semiconductor Manufacturing Co, better known as TSMC, will release fourth quarter and full year results on Thursday January 13.

TSMC Q4 earnings preview: what to expect from the results

TSMC, the largest semiconductor foundry in the world, has delivered record revenue over the past year thanks to the explosion in demand for chips in everything from smartphones, computers and other smart devices to cars.

The biggest problem is that supply continues to struggle to keep up with demand amid the global chip shortage, caused by an array of issues including disruption from the pandemic and ‘geopolitical tensions’. TSMC CEO C.C Wei said in the last earnings call that capacity would remain very tight in the fourth quarter and ‘throughout 2022’, although some other chip firms have predicted things could start to ease in the second half of this year, providing scope for TSMC to improve its outlook. Notably, Tapei’s Commercial Times reported last week that the company plans to raise capital spending in 2022 as it continues to build new capacity in Taiwan, Japan, China and the US, stating its three-year budget of $100 billion could be bumped-up to $112 billion.

TSMC’s quarterly updates tend to be short-and-sweet and focus on the numbers. Monthly sales figures have already revealed that revenue rose to NT438.19 billion from NT361.53 billion the year before. That was ahead of the NT436.19 billion pencilled in by the 30 analysts covering the stock before the December numbers were released today. The consensus expects diluted EPS to rise 12.9% to NT6.22 from NT5.51.

In US dollar terms, TSMC has said revenue will be between $15.4 billion to $15.7 billion and analysts are forecasting $15.6 billion. That would be up 23.2% from the $12.7 billion reported last year – ahead of the 20% target set by the company - and mark a new quarterly record.

Earnings per ADR is forecast to climb to $1.11 from $0.97 last year. Importantly, this is on the assumption that USD/TWD of NT28, but the pair only managed to briefly breach that level during the fourth quarter and has fallen considerably lower during the last three months of 2021 to trade closer to NT27.67 today.

The company said growth in the fourth quarter would be supported by the ramp-up in sales of its most advanced chips based on its 5nm technology, particularly for use in smartphones and computers. TSMC anticipates 5nm wafers will account for around 20% of revenue over the full year, implying this should hit record highs in the fourth quarter after accounting for 14% of sales in the first quarter and 18% in the second and the third.

Sales of 5nm wafers are forecast to steadily grow over the coming years, driven predominantly by demand from the smartphone and high-performance computer markets. But the technology offers lower margins as production increases and TSMC has warned it will take six to seven more quarters before 5nm margins reach the corporate average. This comes at a time when the price of raw materials and commodities needed to produce its chips are rising. Overall margins have tightened over the past 12 months as a result. Analysts are expecting its gross margin to improve to 51.9% from 51.3% in the previous quarter and TSMC has vowed to keep this above 50% by flexing strength in pricing when appropriate. Its operating margin is forecast to contract to 40.7% from 41.2% last year, in-line with the company’s guidance.

Management have promised to provide ‘more colour’ on its prospects for the coming year this week, and any guidance will draw attention. Analysts have pencilled in revenue expectations of $15.3 billion for the first quarter of 2022 and $73.9 billion for the full year.

Investors should also be keeping an eye on any commentary on how newer developments, such as its 4-and-3 nanometre technology, are progressing. Management have confirmed 3nm chips will begin to roll-off the production line in the second half of 2022. 

Where next for TSM stock?

TSM shares gapped higher on the first day of trading in 2022 and swiftly climbed to their highest level in 11 months on January 4. The stock is likely to fall back toward $121 mark, in-line with its moving averages, to close the gap before deciding what direction to move in next.

The 50-day sma has recently crossed both the 100-day and 200-day sma, presenting a strong bullish signal. That is also supported by the fact the RSI remains in bullish territory and that volumes have increased markedly since the start of 2022. On the upside, the stock has tested a line of resistance since September and this could open the door to the all-time high of $142.30 hit last February.

On the downside, a fall below its moving averages could bring $112 into play considering that acted as a level of support on several occasions during late October and early November. Any move below there will turn attention to $107.50, which has proved the key floor over the past 12 months.

The 10 brokers covering TSMC currently have a Buy rating on the stock and an average target price of $143.79, suggesting there is over 13% potential upside from the current share price and new record highs on the cards.

How to trade TSMC stock

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