TSMC's Market Share Gains at Risk Amid Currency Fluctuations and Equipment Shortages

With the new year upon us, investment bank Morgan Stanley has issued a new note for Taiwan Semiconductor Manufacturing Company, according to a report in the Taiwanese daily United Daily News.

TSMC is the world's largest contract chip manufacturer, competing with Intel and Samsung to produce chips with cutting-edge technologies. The industry's insatiable desire to shrink semiconductor feature sizes as far as technologically possible has confined production options to costly high-end machines in short supply.

TSMC Could Benefit From Chip Sector's Recovery in 2024

According to the investment bank, these machines, known as EUV equipment, will be critical to TSMC's future market share gains. Morgan Stanley's base and best-case scenarios set share prices for the world's most valued contract chip manufacturer, UDN, at NT$680 and NT$880, respectively, as per WCCFTech.

Morgan Stanley's bull and base case forecasts for TSMC's stock price are based on the same fundamental rationale as its year-ago coverage as part of its Global Best Business Models V4 stock choices. Back then, the price target picture for the Taiwanese chip manufacturer was slightly rosier, with base and bull case scenarios resulting in share prices of NT$700 and NT$800, respectively.

These have now shifted, with the base case goal falling by 2.6% while the bull case rising by 10%. Morgan Stanley stated in its 2023 research, released at the end of the third week of January, that for TSMC to accelerate to a share price estimate of NT$800, the company would need to benefit from multiple tailwinds.

These include rapid customer migration to 3-nanometer processors due to advances in extreme ultraviolet (EUV) semiconductor technology, Intel orders to manufacture CPUs, Intel or Samsung's retirement from leading-edge chip manufacturing, and growth trends such as artificial intelligence.

The reasons for the UDN's increased price objective match those revealed by Morgan Stanley in its 2023 coverage. However, the UDN adds, citing Morgan Stanley, that TSMC may be unable to maintain a 53% gross margin this year. The gross margin of a company is the amount of money left over after deducting direct manufacturing costs from sales.

TSMC Faces Potential Margin Miss Amid Taiwanese Currency Strength and Equipment Issues

A strengthening Taiwanese currency and equipment-related issues are two variables mentioned in today's report that could result in a margin miss. While it plunged to nearly multidecade lows in 2022, the Taiwanese dollar has appreciated significantly versus the United States dollar. For TSMC, this means that it gets less revenue in Taiwanese dollars and may save money on foreign currency payments.

Morgan Stanley previously reduced TSMC's share price objective to NT$688 and reiterated the target and Overweight rating in December 2023. The share price decline was accompanied by an estimate of 49.5% gross margin, and TSMC's weight on the Taiwanese exchange caused the Taiex to fall in the aftermath of the report. The investment bank predicted that decreased gross margins would weaken TSMC's share price this year.

Photo: Briáxis F. Mendes (孟必思), CC BY-SA 4.0, via Wikimedia Commons