Semiconductors have seen a resurgence back into growth as the cyclicality of the segment is turning in its favor. The recent rally in the semi space is related to the 5G rollout and the revival of hyperscaling. Q4 earnings are on the horizon, and semis are on deck.
Taiwan Semiconductor Manufacturing Company aka TSMC TSM, kicked off earnings for chip makers on a positive note this morning. TSMC is the largest semiconductor foundry in the world, partnering with almost every major chipmaker, and can shed some light on what to expect from semi earnings moving forward. Following TSMC’s robust Q4 results propelled top semiconductor stocks in morning trading.
With the 5G rollout underway, it should come as no surprise that the most significant growth drivers for TSMC in 2019 were related. These drivers included smartphones (49% of sales) and Internet of Things (IoT), which saw a year-over-year topline appreciation of 12% and 33%, respectively.
TSMC’s 4th quarter revenue was driven by smartphone chips, and the rise of its 7nm chip (smallest in commercial use) has begun to push high-performance computing (data centers) demand. 7nm chip manufacturing is the largest revenue driver for this firm, and TSMC is now working on 5nm chips, which should be in commercial production by H2 of 2020 and will sizably enhance chips capabilities.
The ability to make 7nm and 5nm chips is going to drive the next wave of hyperscaling, which appears to have already started. Hyperscaling is a computing company’s ability to effectively scale with demand. These new chips will allow cloud computing and AI firms to achieve capabilities not yet seen. This should drive a substantial amount of demand for these types of chips.
TSMC’s largest customers include smartphone giants like Huawei and Apple as well as top chipmakers like AMD AMD, Nvidia NVDA, Broadcom AVGO, and Qualcomm QCOM. Below illustrate how these stocks have performed over the past 52-weeks.
What’s Priced In?
As a whole, the semiconductor space has been pricing in forecasted growth for this year and next. The demand driven by 5G technology is propelling AVGO and QCOM. The resurgence of hyperscaling is driving AMD and NVDA. The question is whether investors and traders have traded these stocks above their intrinsic value or if they have more room to run.
The two hyperscaling plays, AMD and NVDA, are trading at very rich multiples. It wouldn’t take much for these stocks topple over. Forward guidance is going to be crucial when these companies report in the coming weeks, as this will likely dictate the price action.
AVGO and QCOM are trading at much more reasonable valuations when compared to the broader segment, but are both anticipating to see negative year-over-year EPS change. Despite the negative earnings, there is still a lot of potential in these equities. Change in management guidance will again be critical for a directional move on these stocks.
Below are Zacks Consensus estimates on the key semi earnings in the coming weeks.
TSMC is the backbone of chip-making as it manufactures roughly 50% of semiconductors globally. This firm’s latest earnings gives us some insight into the tech trends we should be expecting going into 2020.
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