It’s relatively rare for end-user semiconductor demand to weaken much, but the semiconductor industry is nevertheless cyclical. The industry typically adds capacity in "big swings", typically in response to lengthening lead-times and shrinking inventories, and the combination of swings in available capacity with the economic cycle leads to the well-known cyclicality in revenues, margins, and earnings that have characterized the industry for decades.
With lead-times starting to ease off and growing expectations of inventory-building late in 2022 or in 2023, it looks like this latest boom cycle is coming to an end. Chip demand growth should continue to grow nicely, and the future for the sector is bright, but investors would do well to consider the risks of weaker guides, shrinking multiples, and weaker share price performances.
That brings me to Taiwan Semiconductor Manufacturing Company (TSM) (or “TSMC”). I was neutral on TSMC back in the fall of 2020 largely due to the valuation, and the shares have since lagged the SOX, as well as individual chip names I liked better, including Broadcom (AVGO) and Renesas Electronics (OTCPK:RNECY), and more or less matched the S&P 500. Given where the cycle is now, though, this may be a name to consider for investors who want to maintain exposure to the sector through the next readjustment phase.
Read the full article at Seeking Alpha:
Taiwan Semiconductor Should Offer A Smoother Ride On Bumpy Roads
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