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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 releasing record fourth quarter results on Thursday, the world’s largest contract chipmaker said it plans to spend between $ 25 billion and $ 28 billion in 2021 to make advanced chips.
This figure surprised Mehdi Hosseini, senior analyst at Susquehanna Financial Group.
“We expected a flat revenue guide with a double digit revenue growth target for the whole year. But it was the capex that surprised and it was well above expectations,” Hosseini said on Friday. on CNBC’s “Squawk Box Asia”.
He added that part of TSMC’s decision to announce such a high figure for likely capital spending is due to an increased competitive threat from Samsung’s chip foundry business.
The potential value of TSMC’s planned capital spending this year lies in the long-term growth opportunities, he said. “They are best in class, they have proven to us that they are the leading semiconductor maker. But when you come up with this kind of big capex, there are some implicit risks in my opinion,” added Hosseini.
He explained that there were two potential issues that could put pressure on TSMC’s future profits. First, TSMC’s decision was likely influenced by an increased competitive threat from Samsung. Hosseini said the revenues associated with capital spending allocated to fight competition would not materialize until the end of 2022.
“This, combined with the fact that margins are shrinking, suggests to me that earnings are going to be under pressure,” Hosseini said.
The second problem relates to a diversification of TSMC’s revenue sources, according to the analyst. For a long time, the chipmaker’s revenue was driven by chipsets designed for iPhones.
“Now that revenues are diversifying and cloud infrastructure is starting to have a big impact, it is extremely difficult to predict the contribution to cloud revenues,” Hosseini said, adding that this increases volatility and speculation about growth. future revenue associated with the cloud, making business planning more difficult.
Hosseini said his 12-month target price for the stock was 425 New Taiwan dollars ($ 15.18), about 28% below the stock’s closing price on Thursday.
For its part, TSMC said it expects growth for the first quarter of 2021 to be driven by demand for chips to support high-performance computing – the ability to process complex data and calculations. at high speed – as well as a recovery in the automotive segment and lower seasonal demand for smartphones than in recent years.
Recently, Reuters also reported that US chipmaker Intel is planning to use TSMC to make a second-generation discrete graphics chip for personal computers in an effort to help combat the rise of Nvidia. Companies such as Intel, Nvidia, Qualcomm, and Apple rely on Asian foundries to manufacture their chips. TSMC has more than half of the global contract manufacturing chip market, including a strong hold on advanced chips.
Analysts said chip prices are expected to recover in 2021 as demand improves due to the prolonged need for remote work and greater adoption of new technologies such as 5G and artificial intelligence. .
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