TSM Faces Sky-High Earnings Bar, Supply Struggles to Match Demand Pace

SPEAKER_1 (0:00)

Time to go deep on TSMC, Taiwan Semi.

It's upcoming earnings report, that is our tech spotlight. Joining me right now, Sarah Kunst, Managing Director of Cleo Capital. I'm so glad you are with us. A lot of excitement around this name, and they always give us these glimpses into demand for the chips, and they always seem to be astronomically good in that they then set the tone for the rest of the chip sector. Why should we think anything different may come out of what's in the next details that they bring to us?

Sarah Kunst (0:35)

I don't think we're going to see surprises in the details. I think that the movement that we are going to see from this earnings is going to be a lot more about what's going on in the wider market, and we have had proof all day now starting in Asia that people are getting very nervous about the AI trade, particularly the chips.

SPEAKER_1 (0:55)

Yeah, I mean, I can't agree more. I mean, we talk about the competitive landscape. There's no question that the demand is there, and that's what we've heard from pretty much every company, how demand is, we just don't have the supply, but now you have CXMT coming out with some different kinds of competitors or Toshiba, or things that are pressuring these kinds of stocks overall. It was noting how South Korea, we saw a big sell-off overnight. So Taiwan sent me, when you think about the exact numbers and the consensus numbers, do you expect for them to beat or meet the earnings per share, and beat or meet the revenue numbers?

Sarah Kunst (1:32)

I don't think we're going to see a big mess. We know the monthly numbers and they roll up to a very nice quarter. We also get a lot of insight because of all of their customers and what their customers are guiding. I think that we are going to see good, solid numbers like we always do.

I just don't know how much impact that's going to have on the stock.

SPEAKER_1 (1:54)

Sorry, excuse me. At this point now, when we think about the global picture on tech and AI demand, where do you see that going and where are we in the revolution?

Sarah Kunst (2:09)

I think that the demand is still there. The question is, does the demand meet the absolutely insane pressure that these companies have to live up to their share prices? I'm not sure it ever has or that it will continue to.

SPEAKER_1 (2:25)

Let's look at some of the other things that you spoke about here. When you talk about the expectations for what we might see in the options market, the 5 percent options market price, do you expect volatility in this stock?

Sarah Kunst (2:40)

I think that the volatility is going to follow the larger market. This is one of the most stable names on the street, even within this semiconductor and chip business. This is something that everybody needs, right? Everybody uses TSM, and so it doesn't really matter who the winner or the loser is at the moment. They are also going to be a TSM customer.

SPEAKER_1 (3:02)

Then what about the competitive landscape? Should we be worried about the likes of CXMT and the news that they are now progressing and what they are developing? There's also analysts who say they have not actually proven that they can do some of that. In the meantime, they caused a big sell-off in some of the chip names.

Sarah Kunst (3:22)

I mean, we have to go back to DeepSeek, right? Remember when that happened and everybody absolutely lost it, freaked out. And it was a little bit of a tempest in a teapot. I think it's something very similar with this.

We know that eventually a lot of people will be able to make chips that sort of rival Nvidia. It is unlikely that China is actually there yet. It is very likely that they are talking a big game that they can't necessarily quite live up to yet.

SPEAKER_1 (3:48)

We think about the margins. I mean, we know costs have been on the rise in general. What about the margins? So that's a key story too, right?

They've been guided between 65 and 67 percent, operating margins 56 to 58 percent. What do you think of those numbers and how do they stack up?

Sarah Kunst (4:07)

I mean, those are nice margins. There will be over time more margin compression and kind of a race to the bottom in the chip space. But when you're starting from well into the 60s, you'll have a lot of room to go down and still have a really healthy business. So I'm not super concerned about that.