TSMC share price rallies following 78% earnings gain

The world’s largest semiconductor manufacturing company beat analyst expectations in its Q4 earnings report, with net income and EPS increasing 78% year-over-year. The stock has been further buoyed by Taiwan’s government passing a law that will reduce its R&D costs for tax purposes by 50%.

- TSMC shares nudge upwards in response to earnings beat

- New Taiwanese law allows semiconductor makers to deduct 50% of R&D costs for tax purposes

- VanEck Semiconductor UCITS ETF up 9% in 2023 to date

Taiwan Semiconductor Manufacturing Company’s (TSMC) [TSM] share price edged upwards in response to the world’s largest semiconductor company announcing a 78% year-over-year increase in both net income and diluted earnings per share (EPS) before markets opened on 12 January.

TSMC’s share price fell 36.7% through 2022, with the gains made during the pandemic reversing following a slowdown in demand from TSMC’s technology clients. However, following gains of 6.4% on 12 January in response to positive Q4 earnings, the stock is up 16.8% in 2023.

TSMC was further boosted in the new year by the passage of a Taiwanese law allowing semiconductor companies to deduct 50% of their R&D spend and 5% of annual expenditures from tax calculations. The move from Taiwan’s governing body, the Legislative Yuan, countered rumours that TSMC is trying to reduce its footprint in its home jurisdiction following increased investments in overseas production facilities such as its new facility in Arizona.

Income and earnings up 78%

Days prior to TSMC’s fourth quarter 2022 earnings release, Bloomberg had forecast revenues of NT$625.5 billion based on monthly data reported by TSMC. Analysts polled by Refinitiv had expected revenues of NT$637.6bn. Despite Bloomberg’s analysis – which ended up being an accurate prediction – TSMC’s share price gained 1.2% on 10 January, thanks to the simultaneous announcement of Taiwan’s tax break and its implications for TSMC.

The full results on 12 January confirmed TSMC’s net income increased 77.8% year-over-year to NT$295.9bn. This yielded earnings per diluted share of NT$11.41, 2.8% ahead of analyst expectations. Net profit margin for the quarter stood at 47.3%, up from 37.9% a year previously. The Q4 results meant that TSMC beat analysts’ full-year EPS expectations of NT$38.86 by 0.87%.

Revenue guidance for next quarter was provided in US dollars, set at US$16.7 to US$17.5bn. Analysts polled by Refinitivcurrently anticipate NT$540.9 (US$17.8bn as of 13 January) for Q1 2023.

Countries battle for semiconductor dominance

On 23 December, reports emerged that TSMC is considering building its first European production plant in Germany. The potential move follows news in November of a planned expansion of TSMC’s US production capacity with a second Arizona factory, and Japanese lawmaker Yoshihiro Seki saying also on 23 December that TSMC is considering expanding its production capacity in Japan.

Global economies are increasingly keen to reduce their reliance on imported semiconductors, given their importance to industries from car manufacturing to supercomputing.

TSMC’s moves to increase its overseas production had led to concerns that Taiwan might lose its “silicon shield” against a potential military attack from Beijing. TSMC chair Mark Liu and Taiwan’s vice premier Shen Jong-chin both pointed to the company’s $60m investment in its factory in the Tainan Science Park as evidence that the company remains committed to Taiwanese production. For now, TSMC’s most advanced 2nm chips will only be manufactured in Taiwan.

The news regarding Taiwan’s chip-making tax break last week will only increase incentives for TSMC to keep as much of its business in the country as possible.

Funds in focus: VanEck Semiconductor UCITS ETF

As of 12 January, TSMC is the second-largest holding in the VanEck Semiconductor UCITS ETF [SMH] with a 10.42% weighting. ASML [ASML] trails after it with a weighting of 10.30%. SMH fell 24.3% in the 12 months to 13 January, but has gained 10.9% in 2023 to date. ASML fell 9.5% in the past 12 months, and gained 19.4% in 2023 to date.

For broader exposure to the space, investors can select the iShares Semiconductor ETF [SOXX]. SOXX has 30 holdings as of 11 January compared to SMH’s 25. TSMC’s weighting is just 3.69%, while top holding Broadcom [AVGO] has an 8.57% weighting. SOXX fell 25.6% over the past 12 months but has gained 10.5% so far in 2023.

Analysts polled by Refinitiv yielded a median 12-month price target of $98.25, 12.9%% above its recent closing price of $87.00.