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On this occasion we are going to deal with one of the companies that has been infected by the attraction effect of the market on the values linked to computer technology and Artificial Intelligence (AI). However, and despite the momentum of the last fortnight by the results and guidance of Nvidia (NVDA.US), and more recently by the apparent agreement in the United States on the debt ceiling limit, let’s get into the matter of how Taiwan Semiconductor Manufacturing Company (TSM.US) continues to face significant risks to its business.

As fears about a possible invasion of Taiwan by Beijing are gaining strength again, leading investors such as Warren Buffett to unwind their long positions in TSM. Still, there are reasons to be optimistic about the future performance of one of the world’s largest semiconductor companies.

TSM is making huge relocation efforts to minimize geopolitical risks and help its stock appreciate in the near term, as its business is set to begin operations on US soil next year. As such, the selling during April and the strong buying in May could represent a decent buying opportunity for investors who want to own one of the largest companies in the world and which is responsible for the manufacture of most supplies of chips all over the world.


TSMC bets strongly on reducing geopolitical risk

At the end of April, TSMC revealed its earnings report and it was relatively disappointing for the first quarter. Although the company’s gross and net margins were 56.3% and 40.7%, respectively, TSMC’s revenue declined 4.8% year-on-year to $16.72 billion and missed estimates by $17 billion. Dollars. This is mainly due to excess inventory from its customers, who found it difficult to sell their products due to the turbulent macroeconomic environment. However, there is an indication that demand is returning and we are approaching the bottom of the market further boosted by guidance from Nvidia that TSMC could call its own.

In the latest results presentation, the company indicated that the gradual recovery of the semiconductor business is likely to begin in the second half of the year, as its customers prepare to launch their new products. There are rumors that TSMC’s biggest customer Apple (AAPL) has booked almost 90% of the company’s 3nm production capacity by 2023 as it is poised to launch its new devices by the end of the year. That’s why there’s reason to believe that TSMC could pick up momentum later this year and hold on later. This is likely one of the main reasons investors expect the company to aggressively improve its performance in fiscal year 24 and beyond.

In addition, as we have already commented in the previous analysis, TSMC does not have significant competition, so it has plenty of scope to continue expanding its business in the coming years. The company is already working on an advanced 3nm process called N3E, which Apple will likely migrate to in the future, while TSMC’s 2nm technology is on track for volume production in 2025 and will likely be lost to older semiconductor technology. advanced in the energy industry for efficiency and density. As a result, TSMC shows tailwinds to continue to expand its technology leadership and maintain its business advantage without facing any major competition in the foreseeable future.

On the other hand, one of TSMC’s main advantages is the fact that it has been striving to diversify its supplies to reduce any geopolitical risk, as it appears that globalization in the chip business is now dead. The company has already invested more than $40 billion in two factories in Arizona that will start producing chips on US soil next year, and additional subsidies from the federal government could help it speed up its relocation efforts.

And finally, TSMC is about to spend $7.4bn on a new factory in Japan and is likely to follow through with a factory in Europe, especially after the passage of the EU Chip Law that was implemented a few weeks ago.

Taking all this into account, it’s safe to say that mitigating geopolitical risks makes it possible for TSMC to better protect its business and restore investor confidence at the same time. Additionally, due to this geographic diversification, location risks are reduced.

TSMC Consensus Price Target (seekingalpha)

According to the consensus of analysts, the share price at TTM (12 months ahead) places three ranges (pessimistic, medium and optimistic). Although the pessimistic scenario projects a 30% drop at the settlement price on May 29, both the medium and optimistic scenarios offer a positive outlook, specifically 4.9% and 34.13% respectively. Something that indicates a majority optimism about the behavior of the action for the next year.

TSM.US D1. Source: xStation

TSM’s technical situation is very positive. After building the inverted head and shoulders reversal figure, the main objective of the action is to recover the projection generated by this structure, at $107.18 per share, the key support zone for consolidation during 2021. If manages to exceed that mark, the next references are at $125.76 and $142.08 per share (blue and green) if the prospects for the sector and less geopolitical pressure develop during 2023.


All eyes on Beijing

Taking all this into account, it is safe to say that the only major thing preventing investors like Warren Buffett from holding a long position in TSMC is rising geopolitical risks, which have grown in importance in recent years. Given that Sino-US relations are unlikely to improve anytime soon, while US officials believe that Beijing aims to be able to invade Taiwan by 2027, many people are likely not to invest in TSMC despite its leadership position. undisputed in the semiconductor industry.

Although the company is working to restore investor confidence by diversifying its operations, there are questions about whether its business would be as attractive elsewhere as it is in Taiwan. There are concerns that TSMC’s global diversification will lead to lower profitability as a result of the higher costs of doing business in the developed world.

In any case, and mainly in the worst case, TSMC will at least maintain its positioning due to the diversification efforts that we have discussed. As such, while its latest actions may not be economically viable in the long term, they are necessary to mitigate the main risks, as potential future actions by Beijing could directly affect the company without any action by its managers. to avoid it.


The bottom line

It is perfectly understandable that investors would divest TSMC due to increased geopolitical risks and look for opportunities in other stocks without this potential risk. In addition, TSMC’s supply diversification also comes at a price and could reduce margins which would negatively affect the bottom line performance of the business in subsequent years.

However, if Beijing sustains the situation in the coming years without taking action, TSMC shares would have the opportunity to appreciate enormously, as the opportunities for growth would outweigh the risks posed. This is primarily because TSMC’s business is uniquely positioned in the semiconductor industry, where it has little to no competition and growing demand for its products. So even if big, well-known investors dump the company in their portfolios, considering TSMC could offer big gains for those who don’t mind being exposed to geopolitical risks.

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