TSMC Can Benefit From Recovery In Chip Sector In 2024 Says Report

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With the New Year finally with us, investment bank Morgan Stanley is out with its fresh note for the Taiwan Semiconductor Manufacturing Company (NYSE:TSM), according to a report in the Taiwanese publication United Daily News (UDN). TSMC is the world’s largest contract chip manufacturer, competing head to head with Intel and Samsung for manufacturing chips with the latest technologies. The industry’s incessant drive to reduce semiconductor feature sizes by as much as technologically feasible has limited manufacturing options to expensive high end machines in scarce supply.

These machines, called EUV equipment, will prove key to TSMC unlocking more market share in the future, believes the investment bank. Morgan Stanley’s base and best case scenarios set share price targets of NT$680 and NT$880 for the world’s most valuable contract chip manufacturer shares UDN.

Developments In EUV Critical For TSMC To Unlock Manufacturing Node Migration Believes Morgan Stanley

Behind its bull and base case scenarios for TSMC’s stock price, Morgan Stanley shares the same underlying reasons that it had in its year ago coverage as part of its Global Best Business Models V4 stock picks. Back then, the price target picture for the Taiwanese chip manufacturer was slightly rosier, with base and bull case scenarios leading to NT$700 and NT$800 share price targets, respectively.

Now, these have fluctuated, as the base case target is down by 2.6% while the bull case has jumped by a cool 10%. In its 2023 report issued at the tail end of the third week of January, Morgan Stanley shared that for TSMC to accelerate to a share price target of NT$800, the firm would need to benefit from several tailwinds. These include an accelerated customer migration to 3-nanometer via developments in extreme ultraviolet (EUV) chip technology, orders from Intel to make CPUs, Intel or Samsung’s exit from making leading edge chips and growth uptrends such as artificial intelligence.

Image: TSMC

The reasons for the updated price target quoted by the UDN today match those shared by Morgan Stanley in its 2023 coverage. However, the UDN does add, quoting Morgan Stanley, that TSMC might be unable to maintain a gross margin of 53% this year. A firm’s gross margin is the money left for it to manage expenses after the direct costs of manufacturing are removed from revenue.

Some factors in today’s report that might lead to the margin miss include an appreciating Taiwanese dollar and equipment related challenges. While it plummeted to nearly multi decade lows in 2022, the Taiwanese dollar has appreciated by quite a bit against the U.S. dollar. For TSMC, this means that it earns less revenue in Taiwanese dollar terms and can conserve funds when making foreign currency payments.

Morgan Stanley had last cut TSMC’s share price target to NT$688 and reiterated this target and an Overweight rating in December 2023. The share price reduction accompanied a 49.5% gross margin forecast, and TSMC’s weight on the Taiwanese exchange had led to the Taiex dropping in the aftermath of the report. The investment bank speculated that lower gross margins could pressure TSMC’s share price this year.

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