January 14, 2020 / 4:11 AM / a month ago

Breakingviews - Consumer wallets are top risk to chip titan TSMC

A security personnel stands near the logo of Taiwan Semiconductor Manufacturing Co. Ltd (TSMC) during an investor conference in Taipei, July 16, 2014. TSMC reported a 15.3 percent rise in quarterly profit on Wednesday, thanks to increased demand from smartphone makers such as Apple Inc. REUTERS/Pichi Chuang (TAIWAN - Tags: BUSINESS LOGO)

HONG KONG (Reuters Breakingviews) - Chip titan TSMC looks immune to trade and supply chain disruptions, but not to consumer wallets. A heady valuation multiple for Taiwan’s $295 billion supplier to Apple, Huawei and others reflects its relentless march on rivals in developing cutting-edge semiconductors. Rising retail prices for ever-fancier smartphones, though, may soon spoil the party.

After shrinking for three consecutive years, the smartphone market is finally on track to grow this year. That’s largely thanks to 5G-powered models, which promise mobile data speeds as much as 100 times faster than the current wireless technology. Industry tracker IDC reckons smartphone shipments worldwide will top 1.4 billion units by the end of the year, up 1.5%. Of that, 5G handsets will account for some 14%. 

That bodes well for the world’s top contract-chipmaker, which research firm TrendForce reckons dominates with over half the market. The company, formally known as Taiwan Semiconductor Manufacturing, is at the forefront of making semiconductors used in smartphones, personal computers, and even crypto-currency mining machines.

TSMC’s lead over rival chipmakers - South Korea’s Samsung Electronics and U.S.-based Intel – is considerable and the Taiwanese company’s customers are probably wary that it does not gain too much pricing power. Still, it means the outfit is less vulnerable to customers moving production or shifting supply chains to avoid tariffs and security concerns.

Expectations are high. TSMC, which will report fourth quarter results on Thursday and provide guidance for the three months to March, is forecast to deliver some T$430 billion, or $14.4 billion, of net profit this year, a 26% rise, according to analyst forecasts on Refinitiv. After rocketing nearly 60% over the past year, the company’s shares now trade at over 20 times forward earnings, well above their five-year average of 14.5.

The biggest risk for this seemingly unstoppable giant is perhaps any waning desire of consumers to pay increasingly large sums out of their disposable income for handheld devices. Smartphone users, for instance, may not want to fork out some $1000, the latest price tag of Samsung’s Galaxy Note 5G model in the United States, on the latest model. For TSMC, that’s not the worst problem to have.

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