Goldman Downgrades Taiwan Semi To Neutral, Cites Valuation

Growth could decelerate at Taiwan Semiconductor Mfg. Co. Ltd. (ADR) TSM in the near term, with a decline in the growth rates of high-end smartphones and further share gains with Apple Inc. AAPL, Goldman Sachs’ Donald Lu said in a report. He downgraded the rating for Taiwan Semi from Buy to Neutral, while raising the price target from NT$173 to NT$180.

Shares At Fair Valuation

Over the past three years, Taiwan Semi’s shares have outperformed the broader Asia market by an average 12 percent per calendar year. The company achieved this via its earnings growth of 18 percent, versus broader Asia remaining mostly flat, analyst Donald Lu noted.

Lu added, however, that an inflection point had been reached. From here, Taiwan Semi would find it difficult to deliver upside surprises in earnings.

Decelerating Growth

The analyst expects Taiwan Semi to generate robust revenue growth of 17 percent q/q in 3Q16. He said, however, that revenue CAGR is likely to decelerate from 18 percent in 2012-2016 to 9 percent in 2016-2018, citing the following reasons:

1. Taiwan Semi is expected to secure 100 percent of Apple's AP business in 3Q16E, and would likely lose share at QUALCOMM, Inc. QCOM in 2016-2017
2. High-end smartphone, which represents 55 percent of foundry content, had muted demand. Lu expects 5G to be the next growth driver in 2019