SINGAPORE – Taiwan Semiconductor Manufacturing Co (TSMC) could face profit pressure after the company announced plans for massive capital expenditures this year, an analyst told CNBC.
After posting record fourth-quarter profits on Thursday, the world’s largest chip maker said it expected to spend between $ 25 billion and $ 28 billion by 2021 to make advanced chips.
That figure surprised Mehdi Hosseini, a senior analyst at Susquehanna Financial Group.
“We had expected a flat sales guide all year with a double digit sales growth target for the full year. But it was the capex that surprised and was well above expectations,” Hosseini said Friday on CNBC’s “Squawk Box Asia.”
He added that part of TSMC’s decision to announce such a large figure for likely capital expenditures is due to an increased competitive threat from Samsung’s chip factory foundry business.
The potential value for TSMC’s planned capital expenditure this year lies in its long-term growth opportunities, he said. “They are the best in their class, they have proven to us to be the leading semiconductor manufacturer. But when you come up with this kind of big investment, I think there are some implicit risks,” added Hosseini.
He explained that there are 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 revenues related to capital expenditures allocated to tackle competition will not be realized until the end of 2022.
“This, coupled with the fact that margins are falling, suggests to me that earnings will come under pressure,” said Hosseini.
The second issue has to do with diversifying TSMC’s sources of income, the analyst said. For a long time, the chipmaker’s earnings have been driven by chipsets made for iPhones.
“As revenues diversify and cloud infrastructure begins to have a major impact, it is extremely difficult to predict the cloud’s revenue contribution,” said Hosseini, adding that it is increasing volatility and speculation about future revenue growth associated with the cloud. making business planning more challenging.
Hosseini said his 12-month price target for the stock is 425 New Taiwan dollars ($ 15.18), about 28% lower than the stock’s closing price on Thursday.
For its part, TSMC said it expects growth for the first quarter in 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 chip maker Intel plans to use TSMC to create a second-generation discrete graphics chip for PCs in an effort to help combat the rise of Nvidia. Companies such as Intel, Nvidia, Qualcomm and Apple rely on Asian foundries to manufacture their chips. TSMC controls more than half of the total contract manufacturing chip market, including a strong grip on advanced chips.
Analysts have said that chip prices are expected to recover in 2021 as demand increases due to the continued need for remote work and greater adoption of new technologies such as 5G and artificial intelligence.