In keeping with analysts, TSMC’s funding plans for 2021 may put earnings beneath strain

SINGAPORE – Taiwan Semiconductor Manufacturing Co (TSMC) could be under profit pressure after the company announced plans for massive investments this year, an analyst told CNBC.

After the world’s largest contract chip maker posted record fourth-quarter earnings on Thursday, it expects to spend between $ 25 billion and $ 28 billion making advanced chips in 2021.

This number surprised Mehdi Hosseini, Senior Analyst at Susquehanna Financial Group.

“We expected a flat sales guide for the whole year with a double-digit sales growth target. But it was the investments that surprised and were well above expectations,” Hosseini said on CNBC’s “Squawk Box Asia” on Friday.

He added that part of TSMC’s decision to announce such a large number for likely investments was due to an increased competitive threat from Samsung’s chip foundry business.

The potential value for TSMC’s planned investments this year is in long-term growth opportunities, he said. “They’re top of the class, they’ve proven to us that they are the leading semiconductor manufacturer. But if you come up with these kinds of big investments, I think there are some implied risks,” added Hosseini.

He stated that there were two potential issues that could put pressure on TSMC’s future earnings. First, TSMC’s decision was likely influenced by an increased competitive threat from Samsung. Hosseini said the revenue related to the cost of capital allocated to fight competition won’t start to materialize until late 2022.

“This, along with the fact that margins are falling, suggests that profits will come under pressure,” said Hosseini.

The second problem, according to the analyst, has to do with diversifying TSMC’s revenue streams. For a long time, the chipmaker’s income came from chipsets for iPhones.

“Now that sales are diversifying and the cloud infrastructure is starting to have a big impact, it is extremely difficult to predict the cloud’s contribution to sales,” said Hosseini, adding that this is related to volatility and speculation about future sales growth the cloud makes business planning more challenging.

Hosseini said his 12-month target price on the stock is 425 New Taiwan dollars ($ 15.18), which is about 28% below the stock’s closing price on Thursday.

TSMC expects growth for the first quarter of 2021 to be driven by demand for chips to support high-performance computing – the ability to process data and complex calculations at high speed – as well as a recovery in the automotive segment and milder seasonal demand for smartphones than in recent years.

Reuters also recently reported that US chipmaker Intel plans to use TSMC to create a second-generation discrete graphics chip for PCs to combat the rise of Nvidia. Firms like Intel, Nvidia, Qualcomm and Apple rely on Asian foundries to manufacture their chips. TSMC has more than half of the total make-to-order chip market, including a strong influence on advanced chips.

Analysts had expected chip prices to rebound in 2021 as demand improves due to the continued need for remote working, as well as the increased adoption of new technologies like 5G and artificial intelligence.

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