Once Upon A Time
Every story begins somewhere. Every single story. For every tale that begins with a wicked step-mother, or seven hard-working, oddly names brothers, at some point the tale, and it's uncertain outcome, revolves around a rotten apple. That's right. I just saw the light behind your eyes engage. You know exactly where I'm going.
A couple of weeks back, Apple (AAPL) warned. They warned us all that revenue would miss for the fourth quarter by a significant margin. Margins? Yeah, those will probably underperform too. The weakness was primarily caused by a lack of sales in China for the latest iPhones. Services, which is where the firm is trying to drive growth will even slow down some. That said, Apple bull Katy Huberty, in an attempt to ease the pressure, did label the slowdown in growth for the services as "temporary" Still, it appears from here that Apple would be losing pricing power over it's own line of hardware. Then came talk of less expensive iPhones and iPads as a way to improve sales. I'm not here today to talk about Apple, so let's move on.
I'm going to guess that you've either heard, or read about the news regarding the U.S. federal government's investigation into Huawei Technologies. Theft of intellectual property and American corporate technology are the issues. On top of that the firm's involvement with Iran had already brought upon it U.S. sanctions. It's also not just the U.S. Around the globe more and more governments and lenders are taking issue with Huawei. Now what do Apple and Huawei have in common, besides the fact they both seem to live at ground zero for the U.S./China trade conflict? That's right. Taiwan Semiconductor (TSM) . TSM's largest customer is Apple, and it's second largest is Huawei.
What You Need To Know
On Thursday morning, Taiwan Semiconductor reported Q4 EPS, or should I say EPADR of $0.63 ( slight beat) on revenue of $9.4 billion (also a small beat). Note that Taiwan Semiconductor trades in the U.S. as American Depository Receipts, and each ADR in the U.S. is equal to five ordinary shares that trade in Taiwan in New Taiwan Dollar terms. The problem is in the guidance. The firm guided the first quarter toward a revenue range of $7.3 billion to $7.4 billion. Wait... did not the fourth quarter come in at $9.4 billion? Not bad. Pretty sharp, kid. This would be the largest drop in revenue for the firm in a decade if realized.
The firm cites a sudden drop in demand for high-end smart phones, which is what both Apple and Huawei need TSM for, to a significant degree. The firm also guided gross profit margins lower as well. TSM in response will cut back on capital spending by "several hundred million dollars." Yeah, that might leave a mark. The firm also paints a bleak picture in terms of their view for the global economy and like many chip manufacturers acknowledges high inventory levels.
After selling off, TSM and much of the rest of the industry group have either rebounded or held loses to a minimum. While encouraging, this mildly surprises in my opinion.
My thoughts here are that TSM remains in a down trend that has seen these ADRs firmly rejected every time the market price approaches the 50 day SMA. I see a need to re-test the recent lows, and would think that the recent pattern of lower highs could continue unless the firm has intentionally set the bar low going forward... which is possible.
TSM Trade Idea
- Don't buy it at all.
- If you think Apple rebounds, buy AAPL.
- If you think the bottom is in the the semis, buy Intel (INTC) .
Why complicate things. By the way, I am long those two names, though I have reduced my stake in AAPL as the portion that I bought in the mid-140's hit target this week. That was a trade. The core position is still intact.