TSMC Q1 2020 – Defying gravity

Too many moving pieces for a clear picture. 

• TSMC reported excellent results as smartphone orders remained resilient and a boost in demand for servers, PCs and office equipment pushed the numbers ahead of expectations.
• However, the company was cautious on its guidance meaning that there are other factors at play in the heavily disrupted supply chain that has meant that weakness in end demand has not yet come through to TSMC.
• In the short-term, this is positive for semiconductors as TSMC is a bell-weather for the industry and its outlook for 2020 indicates that semiconductors may outperform in the coming recession at least for this year.
• Q1 2020 revenues / EPS were NT310bn / NT4.17 ahead of estimates at NT306bn / NT4.17.
• Guidance was also good with the midpoint of expectations set at revenues / gross margin of NT307.5bn / 51.0% again ahead of consensus of NT299.6bn / 48.3%.
• Against all of this good news, TSMC was more circumspect for the full year with its expectations for the semiconductor industry cut to flat from up 8% and a fall of up to 10% in smartphone shipments.
• The discrepancy is being caused by the supply chain where there is currently a lot of restocking going on in China as well as hoarding by electronics manufacturers who fear shortages curtailing their ability to make products.
• The global pandemic has shown just how fragile just-in-time manufacturing can be as well as the risks of having all of one’s manufacturing in China.
• I think that it is companies adjusting to this reality that seems to be a big reason for the strength seen during Q1.
• Looking at end demand paints a very different picture with economic and employment indicators putting some really dreadful figures.
• TSMC was also boosted by a jump in demand for productivity equipment but it also said that this jump in demand may be pretty short-lived.
• This appears to make sense as the lockdown cannot last much longer as plans are rapidly being made around how to safely re-open the global economy.
• When this happens and people go back to work, the demand for these products is expected to fall off sharply but I think not perhaps as much as people expect.
• China is dealing with this operating rotating shifts in its offices with 50% at home one day and other 50% at home the next in order to keep distance between workers at the office.
• In the absence of a vaccine, I suspect that other economies may have to follow a similar course meaning that workers may still be at home half the week for some time to come.
• This will keep demand for productivity equipment and the cloud higher than expected for longer than expected as most are expecting a rapid fall off as soon as re-opening begins.
• Furthermore, I would expect school re-openings not to happen immediately, as social distancing in almost all schools will be almost impossible.
• This leaves Amazon, Microsoft and Alibaba in pole position to continue benefitting but their valuations are not in any way defensive should the market decide that the earnings multiple being paid is too high.
• This makes Intel and the very risky (heavily indebted) Plantronics (now called Poly) interesting as their valuations are already pretty low meaning that they will suffer least from a macroeconomic driven multiple compression in the stock market.
• This is what I would hold if I had to have anything but seeing as I do not, I am staying out entirely as the mismatch between what the stock market is indicating and what the macroeconomic indicators are pointing to has never been wider.