Still has momentum.

We still issue a buy rating on the Taiwan Semiconductor Manufacturing Company (NYSE: TSM). Our optimistic outlook on TSMC is based on our belief that the firm is better positioned to outperform now, as the semiconductor industry slowly but steadily improves and the company accounts for lower demand in FY2023. TSMC’s fourth-quarter earnings reports were mixed; the company beat profitability projections but fell short on sales. Despite this, the stock climbed roughly 5% when earnings were released. We believe TSM is attempting to counteract reduced end-market demand and inventory corrections, which have hurt sales and lowered forecasts for the upcoming quarter. It is likely that a bottom in TSM and the semi-space in 1H23, followed by a significant recovery in the year’s second half.

We feel that TSM’s stock is a good entry place before the semi-space rebounds. Since our last post on TSMC in late October, the company has already gained 41%, surpassing the SOX index, which has gained only 21%. The graph below depicts our rating history for TSMC.

We urge that investors disregard the market hype surrounding fears of a Chinese invasion of Taiwan and instead focus on the company’s industry-first approach. We believe that TSMC is best positioned to benefit from chip demand once the semiconductor market recovers. Furthermore, we anticipate the company will have the additional power to raise ASP in the second half of 2023. We recommend that investors purchase the stock at current levels in order to benefit from TSM’s rising growth trend in 2023.

The leading pure foundry space allows for ASP gains.

We favor TSMC’s position in the foundry industry, with a 60% market share in 4Q22, and expect it to boost ASP on advanced nodes. We predict TSMC’s market share will expand significantly in 2022 as a result of the increased manufacture of smaller, more sophisticated 5nm wafers. Nanometer size is at the heart of technical developments in the semiconductor industry and, by extension, the world. To be more specific, nanoscale size refers to the distance between transistors on a chip; the smaller the chip, the more advanced and high-performing it is. Our positive outlook on TSM is predicated on our expectation that the company’s growth would be driven by increased adoption of advanced nodes, which are gradually accounting for a larger portion of TSMC’s revenue by technology. TSM has also begun the manufacture of 3nm processors for Apple (AAPL), sustaining Moore’s Law and looking ahead to next-generation technologies.

We anticipate that the rising global adoption of advanced nodes to meet the surging demand for semiconductors will fuel TSMC’s medium- to long-term growth. As a result, we anticipate that TSMC’s position will allow it to improve ASP on advanced nodes in 2H23, owing to the fact that it retains big semi-players as top clients, including Nvidia (NVDA), Advanced Micro Devices (AMD), and AAPL, among others.

Headwinds still persist

TSMC is not immune to the demand slowdown caused by macroeconomic headwinds, as seen by a dip in 1H23 followed by a fast recovery in 2H23. In Thursday’s results call, TSMC CEO C.C. Wei clarified, stating he anticipates 2023 to be a “slight growth year.” We expect TSMC will face inventory corrections in 1H23 as a result of the deteriorating chip-demand environment. We estimate CAPEX reduction in TSMC during 2023, largely as major client AAPL forecasts reduced demand despite weaker consumer spending. TSMC management warned that revenue would fall by roughly 5% in 1Q23, and that annual spending would be reduced. TSMC announced a CAPEX of $36.3B in 2022 and expects CAPEX to be $32-36B in 2023. We are not concerned by TSMC’s lower 1Q23 prediction because we believe the firm is de-risking guidance due to the challenging macro environment.

Despite the macroeconomic challenges, we expect TSMC to continue growing its foundry operations outside of Taiwan in order to mitigate the risks of geographically concentrating manufacturing on the disputed Island. We believe TSMC will play a larger role in the global shift to manufacturing chips in the United States after the CHIPS Act is implemented in 2022. The business intends to more than increase its investment in US foundries to $40 billion by 2026, establishing the US as a hub for advanced chip manufacturing. We estimate that it will take three to four years for US semiconductor companies Intel (INTC) and TSMC to meaningfully produce chips on US territory. Nonetheless, we anticipate that TSMC’s US fabs will be a long-term growth driver.

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We predict TSMC stock to rise in the second half of 2019 as the semiconductor sector recovers from a 15-month slump. We anticipate that product introductions and expanded manufacturing of 5nm wafers will help the semiconductor industry recover.

Valuation

We feel TSMC is a value investment since it is selling at a discount to its peer group average. The company is trading at 14.4x C2023 P/E, compared to the peer group average of 21.9x. The company is currently selling at 0.2x EV/C2023 Sales, compared to the peer group average of 4.8x. We believe TSMC stock offers an appealing entry point at current levels, and that investors who purchase the stock now will be well rewarded in 2023.

What should be done with the stock?

We remain optimistic about TSMC. We believe the stock is reacting to lower chip demand in 2023. While we expect the stock to remain volatile in 1H23 as the semiconductor space bottoms, we believe TSMC will benefit from demand tailwinds as the semi-space recovers in 2H23. We also anticipate that TSMC’s growth will be fueled by higher 5nm production and the company’s capacity to boost ASP on advanced nodes in 2H23. We feel the stock offers a good entry point at the current price and propose that investors acquire it.

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After reaching record lows not seen since 2016, 2022 was merciless for Alibaba Group Holding (NYSE: BABA). This comes as no surprise given all of the recent China-related news. A zero-COVID policy has stifled output and demand, while antitrust laws from the ruling party have targeted its tech companies. The continued supply chain and labor constraints haven’t helped matters either. Was 2022 always a difficult year with such headwinds?

Maybe, but things are starting to turn around, and it appears that the bulls have returned. Major tailwinds are expected to carry Alibaba into 2023. Let’s look at a few of them.

Positive Outlook

For openers, analysts have identified numerous stocks as poised for a comeback bounce in the coming year. Alibaba is one of the most recent example. On Monday, Morgan Stanley named the e-commerce behemoth their favorite in the tech sector. According to Gary Yu and his team, investors have “underappreciated Alibaba’s leverage to a Chinese consumption rebound.” This is mostly owing to its retail success in areas such as consumer products.

Yu also anticipates an improvement in China’s regulatory environment, which will go a long way toward reversing the selling pressure that has brought shares down as much as 80% from their 2020 highs. But it isn’t all. Founder Jack Ma recently announced his intention to step down as CEO and pass over the reigns to someone else.

With his name now being disassociated with Alibaba, one more risk and possible headwind has been removed.

Along with the bullish outlook, Morgan Stanley reiterated its Outperform rating and set a $150 price objective for Alibaba shares. This indicates a 30% upside from current levels based on where they closed on Wednesday. Shares are already up almost 100% from their lows in October, so this outlook,  simply adds gasoline to the belief that a significant recovery rally is in the works.

Additional tailwinds exist in the shape of the zero-COVID policy being reversed, which will finally allow the Chinese economy to recuperate after living in constant dread of a lockdown. This comes after widespread rallies caused the government to cave, which is unusual in China.

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Alibaba’s Risk Factors

There are risks, the most visible of which are geopolitical tensions. When compared to a decade ago, the United States and China are no longer on good terms. The conflict in Ukraine and escalating tensions with Taiwan have not helped the relationship.

This has filtered down to corporations, with the United States refusing to transfer semiconductor chips to China for fear that they may be used against them in the future. Chinese retaliation is not ruled out and would almost certainly aggravate the situation.

Furthermore, the delisting risk that has dogged Alibaba and its counterparts in recent years has not materialized as many bears predicted. It still exists, but the longer Alibaba remains on the good side of US auditors, the more likely its shares will become a permanent fixture on the New York Stock Exchange.

Indeed, there was news on this front as recently as the last week of December, when it was reported that numerous US-listed Chinese companies had abandoned intentions to list in Hong Kong. This approach was positioned as their backup option for remaining listed outside of China if the US followed through on the threat of delisting.

Still, this is the beast from the east, Alibaba. While shares have been heavily discounted in recent years, a specter of their former self remains, as indicated by the stock’s doubling in value in less than three months.

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An EV startup

There are several new electric car firms that have emerged in recent years that are competing for the top spot in what will undoubtedly be a significant and protracted switch from combustion engines to electrified vehicles. Some EV start-ups merely attempted to ride the tide of interest for EVs without having a functioning product. But among many others, Lucid Group (NASDAQ: LCID) stood out as a reliable EV business with a marketable product.

The company claims to be on schedule to build up to 7,000 vehicles in 2022 (it hasn’t yet disclosed its annual production rates), and MotorTrend has praised its luxury EV sedan, the Air. Lucid has demonstrated its ability to create automobiles, but the business still has some major obstacles to overcome.

Where will Lucid be in a few years, then? Let’s look more closely.

What’s going on with Lucid at the moment

Since 2021, when Lucid went public via a special purpose acquisition company (SPAC), its share price has decreased by 32%. Along with some company-specific challenges, the overall EV industry also encountered impediments during the period of the significant decline.

First, Lucid must control the increasing cost of EV components, which compelled the business to raise the price of several Air sedan variants in the middle of 2022. More significantly, Lucid’s bottom line is suffering as a result of the growing prices. The EV manufacturer only generated $195.5 million in revenue in the third quarter, suffering a $670 million loss. Through a fresh round of stock sales, Lucid just received extra funds to the tune of $1.5 billion, and more may be on the way.

The business predicted in August that over the following few years, it might raise up to $8 billion through stock offerings. Investors will need to pay close attention to how successfully Lucid uses the $1.5 billion in new cash (and the opportunity to raise more) to reduce the gap between its top and bottom lines.

Along with suffering losses, Lucid also had to make two cuts to its 2022 production guide, reducing it from an initial projection of 20,000 vehicles to a range of roughly 6,000 to 7,000 vehicles. Due to “exceptional supply chain and logistics issues,” the company stated that it had to decrease its production forecasts.

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To be fair, other EV start-ups have recently had to lower their production targets as well, but Lucid’s drastic reduction in its production objective indicates that the business is still having trouble expanding its operations.

Where the Lucid Group might be in three years

Predictions are usually difficult to make, but based on the current state of Lucid, there are a few things that might occur during the course of the next three years.

First, as material costs grow, the corporation will probably have to raise the price of EV batteries. Other EV manufacturers will also feel this, but as a young start-up, Lucid may find it more difficult to turn a profit. Battery prices increased by 7% in 2022, and according to BloombergNEF analysis, they won’t start declining once more until 2024.

Additionally, this might compel Lucid to increase the price of its already pricey electric vehicle selection (the Air’s base model starts at $87,400). Although Lucid has no interest in selling cheap EVs, growing material costs might coincide with a possible downturn.

That brings up Lucid’s next obstacle for the following three years: a potential U.S. recession that slows down demand for EVs. According to some forecasters, the United States could experience a recession this year, and any severe slowdown in the economy could reduce demand for Lucid’s high-end EVs.

Other concerns

Increasing inflation and high loan rates will affect their business in 2023 and delay the adoption of EVs over the ensuing few years, according to 76% of car executives polled recently by KPMG.

Of course, the United States could avoid a recession, but even the threat of one could lead EV purchasers to postpone such a pricey purchase.

And finally, over the coming years, Lucid can still experience problems with its vehicle production. The business delayed the release of its forthcoming SUV, named Gravity, to 2024 after missing its initial production guidance for both 2021 and 2022.

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Given its relatively poor start over the last two years, the firm is likely to continue to lag behind some of its other EV competitors even if it is able to ramp up delivery numbers and make improvements in production.

This EV stock is not for those who are easily scared.

Lucid Group: Doomed or not? Obviously not. Any EV firm you take a serious look at right now is suffering from high material costs, inflation, the uncertainty of the recession, and supply chain problems.

However, Lucid is currently in a particularly precarious position as it struggles to establish itself in the EV market and contends with all of the aforementioned challenges.

As the business works to address all of these difficulties over the following few years, EV investors should exercise extreme caution when considering purchasing Lucid at this time. The risk is increased by the current price-to-sales ratio of 30 for Lucid’s stock, which makes it unusually costly when compared to EV market leader Tesla, which has a P/S ratio of 5.5.

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