Supply chain issues have caused headaches for semiconductor firms, who are experiencing heightened demand for their products at a time where they can’t get hold of materials quickly enough. In Europe, GlobalFoundries and STMicroelectronics are doing what they can to increase supply, although TSMC is yet to reveal its plans.
Chip stocks gained some momentum towards the end of last week as Taiwan Semiconductor Company (TSMC) [TSM] posted a record profit for Q2, allaying fears, albeit even briefly, over softening demand from high inflation and reduced spending.
The TSMC share price has recovered from recording a 52-week low of $73.74 on 5 July to close at $87.79 on 21 July. The stock remains down 26.3% since the start of the year. The Invesco PHLX Semiconductor ETF [SOXQ] has climbed 22.3% from its 52-week low also set on 5 July, although it is down 26.2% since the start of the year.
TSMC expects headwinds ahead, though. CEO, CC Wei, said on the earnings call that “our customers’ demands continue to exceed our ability to supply. We expect our capacity to be tight through the end of 2022”. Excessive inventory will take a few quarters to rebalance to a normal level.
Wei is also expecting some capital expenditure to be “pushed out into 2023” as a result, while issues that continue to snarl supply chains will extend delivery times for certain chip making equipment.
Despite some concerns, China Renaissance analyst, Sze Ho Ng, told CNBC that TSMC is well-positioned to continue growing even in the event that the broader chip market remains down year-over-year. “I would say that TSMC is a class of its own, with a well-built moat,” he said.
GlobalFoundries and STMicroelectronics enter Europe
Back in June, TSMC said it had no imminent plans to build factories in Europe. This comes as Taiwan is looking to strengthen its relations with the EU to encourage Taiwanese chip manufacturers to invest in the bloc.
The EU has an ambitious target of having a 20% share of global semiconductor production by 2030, up from 9% today, with a particular focus on cutting-edge technology. The pandemic and geopolitical tensions have highlighted the problem of relying on chips to be imported from the likes of Taiwan and Korea.
Bloomberg reporter Jillian Deutsch noted earlier in July that TSMC could be “just biding its time in Europe. The company kept quiet about plans to build in the US until it had an actual proposal to announce.”
Two companies that are investing in Europe are GlobalFoundries [GFS] and STMicroelectronics [STM]. They announced on 11 July that they’re partnering to build a factory in France that they hope will achieve full production capacity of 620,000 wafers a year by 2026.
Cloudy outlook for chipmakers
The GlobalFoundries share price is up 13.4% since then but down 25.1% since the start of the year (through 21 July). The STMicroelectronics share price is up 13.2% and down 27.7% in the respective periods.
GlobalFoundries is set to report Q2 2022 earnings on 9 August and Needham analyst Rajvindra Gill believes its numbers will reflect a weaker demand for smartphones, especially in China. He has lowered his revenue estimate for fiscal 2022 by 4%, according to a note seen by Barron’s.
While the electronics industry is set for weaker demand in the second half of the year, things should start to accelerate for the automakers. This should be good news for STMicroelectronics, which supplies to the industry.
“The [automotive] industry is still short parts, and I think that with growth in EVs, you’ll continue to see strong growth here,” John Barr, portfolio manager at Needham Investment Management, told Bloomberg earlier this month.
Despite the cloudy outlook for the broader sector, GlobalFoundries has 14 ‘buy' ratings and a ‘hold' rating, according to MarketBeat. The consensus price target is $74.13, implying an upside of 34.3%. STMicroelectronics has eight ‘buy’ ratings, four ‘hold’ ratings and a ‘sell' rating. The consensus price target of $54.67 implies an upside of 35.5%.
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