SINGAPORE – Taiwan Semiconductor Manufacturing Co. (TSMC) could face earnings pressure after the company announced massive capital spending plans this year, an analyst told CNBC.
After making record gains in the fourth quarter on Thursday, the world’s largest chip maker said it expects to spend between $ 25 billion and $ 28 billion in 2021 to produce advanced chips.
This figure surprised Mehdi Hosseini, senior analyst at Susquehanna Financial Group.
“We were expecting a flat revenue guide with a double-digit revenue growth target for the whole year. But the capex surprised and far exceeded expectations,” Hosseini told CNBC’s Squawk Box Asia on Friday.
He added that part of TSMC’s decision to announce such a large figure for capital spending is likely due to increased competitive threat from the chip-making foundry company Samsung.
The potential value of TSMC’s planned capital expenditures for this year lies in long-term growth opportunities, he said. “They are the best in the class, they have proven to us that they are the most important semiconductor manufacturers. But when you think this kind of big capex, there are some implicit risks in my opinion,” Hosseini added.
He explained that there are two potential issues that could put pressure on TSMC’s future revenues. First, TSMC’s decision was likely to be influenced by an increased competitive threat from Samsung. Hosseini said the revenue associated with capital expenditures allocated to fighting competition will not materialize until the end of 2022.
“This, combined with declining margins, suggests that gains will be under pressure,” Hosseini said.
The second issue is related to the diversification of TSMC’s revenue sources, according to the analyst. For a long time, the chip maker’s revenue was driven by chipsets made for iPhones.
“Now that revenues are diversifying and cloud infrastructure is beginning to have a big impact, it is extremely difficult to predict the contribution of cloud revenues,” Hosseini said, adding that volatility and speculation about future revenue growth associated with the cloud is increasing. which makes business planning more difficult.
Hosseini said its 12-month price per share is $ 425 new Taiwan ($ 15.18), about 28% lower than the closing price of the stock on Thursday.
For its part, TSMC said growth for the first quarter of 2021 is expected to be driven by demand for chips to support high-performance computing – the ability to process data and complex high-speed calculations – as well as a recovery in the segment. car and milder seasonal demand from smartphones than in recent years.
Recently, Reuters also reported that US chip maker Intel plans to use TSMC to create a discrete second-generation graphics chip for personal computers in an attempt to help combat Nvidia’s rise. Companies, including Intel, Nvidia, Qualcomm and Apple, rely on Asian foundries to make their chips. TSMC owns more than half of the global contract manufacturing chip market, including a strong hold of advanced chips.
Analysts said chip prices are expected to recover in 2021 as demand improves due to the prolonged need for remote work, as well as greater adoption of new technologies such as 5G and artificial intelligence.