SINGAPORE – Taiwan Semiconductor Manufacturing Co (TSMC) may face profit pressure after the company announced plans for major capital expenditures this year, an analyst told CNBC.
Having recorded record earnings in the fourth quarter on Thursday, the world’s largest contract chip maker said it expects to spend between $ 25 billion and $ 28 billion in 2021 to make advanced chips.
That figure surprised Mehdi Hosseini, a senior analyst at Susquehanna Financial Group.
“We expected a stable revenue guide with a double-digit revenue growth target for the whole year. But it was capex that surprised and was well above expectations,” said Hosseini on Friday at CNBC’s “Squawk Box Asia” .
He added that part of TSMC’s decision to announce such a high amount of likely capital expenditures was due to a growing competitive threat from Samsung’s chip-making foundry business.
The potential value for TSMC’s planned capital expenditures this year lies in long-term growth opportunities, he said. “They are the best in the class, they have proved to us that they are the leading semiconductor manufacturers. But when you arrive with this kind of big investment, there are some risks implicit in my opinion,” added Hosseini.
He explained that there were two potential problems that could put pressure on TSMC’s future earnings. First, TSMC’s decision was probably influenced by a growing competitive threat from Samsung. Hosseini said that the revenues associated with capital expenditures allocated to fight competition will not materialize until the end of 2022.
“This, combined with the fact that margins are falling, suggests to me that profits are going to be under pressure,” said Hosseini.
The second problem has to do with the diversification of TSMC’s revenue sources, according to the analyst. For a long time, the chipmaker’s revenue was driven by chipsets made for iPhones.
“Now that revenues are diversifying and cloud infrastructure is starting to have a major impact, it is extremely difficult to predict the contribution of cloud revenue,” said Hosseini, adding that this increases volatility and speculation about the future growth of the revenue associated with the cloud, which makes business planning more challenging.
Hosseini said his 12-month target price for the stock is 425 new Taiwanese dollars ($ 15.18), about 28% below the stock’s closing price on Thursday.
In turn, TSMC said it expects growth for the first quarter of 2021 to be driven by demand for chips to support high-performance computing – the ability to process complex data and calculations at high speed – as well as a recovery in the automotive segment. and milder seasonal demand for smartphones than in recent years.
Recently, Reuters also reported that American chip maker Intel plans to use TSMC to make a discrete second-generation graphics chip for personal computers in an attempt to help combat Nvidia’s rise. Firms like Intel, Nvidia, Qualcomm and Apple rely on Asian foundries to make their chips. TSMC holds more than half of the overall contract chip manufacturing market, including a strong share in advanced chips.
Analysts said chip prices are expected to recover in 2021, as demand improves due to the prolonged need for remote work, as well as greater adoption of new technologies such as 5G and artificial intelligence.