Taiwan Semiconductor Manufacturing (TSM/TSMC) Pre-earning Analysis
Chart done on hourly timeframe. Expectations are high for Taiwan Semiconductor as the company gets ready to report its second quarter earnings. Analysts project second quarter profits to grow 30% compared to last year, which is doable considering the company’s recent June revenue report already showed 33% YoY growth. TSMC is generating billions from global investments into generative AI, and sponsorship from the U.S. government has also given them billions to spend towards research and development. The company is well-known to have ties with Nvidia, being their sole maker of GPUs and giving them an edge in the semiconductor industry.
Investors of the company have enjoyed more than 100% in return on their position in the past year, but the stock’s valuation has grown to a price to earnings ratio of 35x, which is fairly expensive compared to the healthy 15-25. There are only two ways to improve a P/E ratio, either by boosting profits, or by the stock’s price coming down. This means that profitability will be a major focus for investors this quarter. If TSM can indeed meet the ambitious expectations of 30% growth, and also post strong guidance, then investors may be more inclined to continue buying the stock here near all time highs. However if they miss or disappoint on projections, then the stock is a hair trigger away from profit taking from these highs.
Despite popular belief and what the chart reflects, TSM didn’t have a very good year in 2023 in terms of fundamentals. Q1 of 2024 was their first positive growth quarter out of the last five, so they need to maintain growth to avoid slipping back into the negative streak. Demand for AI chips should help them do just that, but if it can’t, then they could appear weak in a sector that’s highly in demand.
Option chain analysis:
There’s absolutely no way of telling how a company will react to earnings. Sometimes the company meets all their expectations, but their leaders end up saying something on the call that triggers a sell-off, or vice versa. There are ways to predict how large the post earnings move may be though, and according to the options market, we see that traders expect TSM to move as much as $22 between now and August 16th, the direction of that move depends on the earnings outcome.