This article is a continuation of our free newsletter from May 23, Nvidia Stock Faces a Choppy Q2, But Tailwinds Build for H2 Acceleration.
For our Premium Members, we discuss the following:
- Our analysis on the stock’s valuation and if the stock is a “buy” or a “hold” given the stock faces immense demand from the AI economy yet must also weather geopolitical tensions.
- The I/O Fund’s trading plan for TSMC including never-before published buy targets over a 12 to 18-month time frame.
TSMC’s Valuation:
Historically, semiconductors do not trade at the valuations we saw in 2024. Therefore, the market is essentially saying (given the risks around China), we are not willing to pay the exuberant premium of 2024. Valuation is the primary reason most semiconductors are flat over a 1-year period.
This is visible in TSMC’s forward PE ratio to where anything over 20 is quite rare. The 3-year median is 18.5 while the stock is trading at 21. The forward PE ratio peaked at 30.
When you zoom out 10 years, the TTM PE ratio rarely trades over 25 except for the blowoff top in 2021 and the AI boom of 2024.
When you look at the top line, something similar is seen to where the stock is trading at the 5-year median of 10 PS on a TTM basis.
On a forward basis, the stock is trading at 8.3 — which essentially means the stock is fully valued unless a technical setup shows us the broad market, semiconductor baskets (ETFs) and/or other leaders like Nvidia are ready to resume leading the market. Rarely will we buy a stock that is at its 3-year or 5-year median unless there is broader participation. With that said, once there are signals that TSMC and a few other AI stocks are ready to lead again, we will not hesitate to buy as the stock is a safe, long-term winner in our opinion.
A Few Simple Reasons we like TSMC as a Long-term Winner:
- Demand exceeds supply and will into the foreseeable future
- It’s one of the only companies that has strong pricing power – in fact, it exceeds Nvidia on this point. Reference my Q2 webinar around minute 13:32
- The margins and the cash separate it from other semiconductor choices
- The United States government will ensure TSMC is successful as a matter of global dominance
- One thing to watch out for: TSMC is exposed to smartphones and even with outsized AI demand, HPC segment can be lumpy and cyclical. The H2 slowdown that management guided for could put pressure on the stock.
Taiwan Semiconductor (TSM) Technicals Overview:
By Knox Ridley
Like the entire market, TSM is coming to the end of an impressive recovery off the April 7th lows. Note how price went vertical in early – mid May in the chart below. This happened with the highest amount of volume and momentum that we have seen in the bounce, so far. What has followed is a continuation higher in price; however, with less volume and less momentum. This is a common occurrence toward the end of a trend. Furthermore, since late May, TSM has been trading within a rising wedge pattern, which is a common pattern seen in the last push higher of a trend.
As long as TSM holds over $188, we can see a continuation of this drift higher throughout June. Once we break below $188, we will see a reversal of this bounce. When this happens, what will be important are two factors on determining the next larger move in TSM, as well as the larger market:
What is the pattern the correction takes? If we see a messy/overlapping drop that takes the shape a of a 3-wave pattern, then we believe TSM is setting up for a bigger push to new highs later into the year. If instead, we see a more aggressive/direct drop lower that takes the shape of a 5-wave pattern, we are setting up for a larger drop below the April 7th lows.
Any drop, regardless of pattern, must hold over $146. Below this level, and the odds greatly favor that we are heading to new lows.
Based on how the next correction plays out within the above parameters, there are two general scenarios that the price action best represents:
Red – This would see the next drop taking the shape of a 5-wave pattern that ultimately breaks through $146. If this happens, we will see final targets for this drop to be, at least, in the $120s.
Green – If we see the next drop take the form of a 3-wave drop that holds over $146, then we could be setting up for a rally toward the $300s.
As stated, both fading momentum and volume, coupled with a filled-out pattern is suggesting that we are closer to the end of this bounce. Once it completes, the nature and depth of the correction will determine if we aggressively buy more or hedge our position.
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