TSMC's Drop After Earnings on Short-Term News is A Long-Term Opportunity

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I have been a contributor here at for 12 years now, and over that time one of the most consistent themes of my contributions have been opportunities that arise when the stock of a fundamentally sound company with a good growth outlook falls on news that is interpreted as a short-term negative.

That news may be to do with a one-off event such as when Equifax (EFX) dropped sharply following a data breach before bouncing back strongly, but more often than not it is when what look like good earnings are accompanied by a comment that prompts a negative response.

Most of the time when that happens, there is a perfectly good reason. Maybe the beat on earnings and revenue was the result of a one-time positive influence, or despite a good quarter the forward guidance and outlook disappoint the market.

However, even after decades in and around financial markets, there are times when a negative reaction to earnings in a stock leaves me shaking my head, searching for what I might have missed. This morning’s drop in TSMC (TSM) is one of them.

The Taiwanese semiconductor manufacturer reported better than expected EPS on better than expected revenue, while laying out the reasons they are optimistic about the next year or so. That all sounds positive, but the stock did this:

TSM chart

I suppose that might make sense if TSM were one of those stocks with sky high P/Es where it is almost impossible for any earnings report or guidance to live up to market pricing and expectations, but with trailing and forward price to earnings ratios in the twenties, that isn’t the case here. The company did reveal that the earthquake in Taiwan did some damage to some wafers resulting in the need to replace that production, but they are confident that can be done in the next quarter.

I guess that will impact near term profitability, but if that is what is causing the drop, then it is a classic case of a short-term setback resulting in a price drop that represents an opportunity for investors who are capable of thinking more than three months out. It may, I guess, produce some short-term volatility, but from a long-term perspective, TSMC’s future looks bright.

They are the world’s leading chip producer, with 61% of global foundry revenue, but they are also the most efficient, with margins of around 40% as compared to the 12-15% common elsewhere in the industry. With that kind of market dominance and those margins, they are ideally placed to take advantage of any growth in global demand for chips and, in case you missed it, a little thing called AI is fueling some growth in that area.

I have been doing this long enough to know that most of the time, if a move makes no sense to you, it is because you have missed something. There is, after all, far more chance that you are wrong than there is that everyone else combined is making a mistake, and I presume that is the case here.

However, the more I look at this, the more I realize that it doesn’t really matter. TSMC is a well-run, efficient company with market dominance in an industry that is growing in leaps and bounds. They have the technology and know-how to produce ever smaller and more efficient chips that will stimulate demand for years to come, and on that basis, any significant drop in the stock on short-term news represents an opportunity for long-term investors.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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