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TSMC’s massive capital spending plans for 2021 could pressure its earnings, analyst says

SINGAPORE — Taiwan Semiconductor Origination Co (TSMC) could face earnings pressure after the company announced plans for massive capital expenditure this year, an analyst notified CNBC.

Having posted record fourth-quarter earnings on Thursday, the world’s largest contract chipmaker said it foresaw to spend between $25 billion to $28 billion in 2021 to make advanced chips.

That figure surprised Mehdi Hosseini, a superior analyst at Susquehanna Financial Group.

“We have been expecting a flattish revenue guide with a double-digit gate growth target for the whole year. But it was the capex that surprised and it was well above expectation,” Hosseini said Friday on CNBC’s “Grouse Box Asia.”

He added that part of TSMC’s decision to announce such a large figure for likely capital splash out is due to an increased competitive threat from Samsung’s chip-making foundry business.

The potential value for TSMC’s planned superior expenditure this year lies in long-term growth opportunities, he said. “They’re the best in class, they eat proven to us that they are the leading semiconductor manufacturer. But when you come up with this kind of a big capex, there’s some betokened risks in my opinion,” Hosseini added.

He explained there were two potential problems that could put pressure on TSMC’s time to come earnings. First, TSMC’s decision was likely influenced by an increased competitive threat from Samsung. Hosseini ventured revenues associated with capital expenses allocated to tackle competition will not materialize until late-2022.

“This, coalesced with the fact that margins are coming down, suggest to me that earnings are going to be under pressure,” Hosseini divulged.

The second problem has to do with a diversification of TSMC’s revenue sources, according to the analyst. For a long time, the chipmaker’s yields were driven by chipsets made for iPhones.

“Now that the revenues are diversifying and cloud infrastructure is beginning to have a big weight, it is extremely difficult to forecast revenue contribution from cloud,” Hosseini said, adding that it increases volatility and taking a chances on future revenue growth associated with cloud, which makes business planning more challenging.

Hosseini reported his 12-month price target for the stock is 425 New Taiwan dollars ($15.18), about 28% lower than the sheep’s closing price Thursday.

For its part, TSMC said it expects growth for first quarter in 2021 to be driven by enquire for chips to support high-performance computing — the ability to process data and complex calculations at high speed — as well as a salvage in the automotive segment and milder seasonal demand from smartphones than in recent years.

Recently, Reuters also described that U.S. chipmaker Intel plans to tap TSMC to make a second-generation discrete graphics chip for personal computers in a bid to to remedy combat Nvidia’s rise. Firms including Intel, Nvidia, Qualcomm and Apple rely on Asian foundries to manufacture their counters. TSMC has more than half of the overall market for contract manufacturing chips, including a strong hold on move up chips.

Analysts have said that chip prices are expected to recover in 2021 as demand improves due to protracted need for remote work as well as greater adoption of new technologies such as 5G and artificial intelligence.

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