What Markets Expect From Taiwan Semiconductor's Upcoming Earnings

Investors need to look at one key piece of information before Taiwan Semiconductor stock's earnings. The company's investor relations website has a report on monthly revenue, which has reported double-digit growth (on an annual basis) for every month so far into 2024.

A contraction in gross margins, signaling rising production costs or falling pricing power, could mean that the industry is headed into a lower demand (or higher inventory) environment today. If this is true, then ASML's contraction in bookings is only the beginning for the rest of the players in this space.

Despite seeing double-digit revenue growth over the year, Taiwan Semiconductor posted a net decline of 13.4% in operating cash flows, which often act as a proxy for a company's earning power over the measured period. These faltering metrics add pressure to the potential of Taiwan Semiconductor to report a strong quarter this week.

But all hope is not lost for the company, which is still beating expectations. That's why investors need to dig deeper into market expectations and decode a few metrics that are most often overlooked.

Markets are willing to overpay slightly for Taiwan Semiconductor stock compared to peers in the space today, especially regarding a price-to-book (P/B) and price-to-earnings (P/E) ratio. Trading at a 33.5x P/E places Taiwan Semiconductor at a premium to the semiconductor industry's average valuation of 29.5x today.

The same trend extends to Taiwan Semiconductor's P/B valuation of 8.6x today, also above the industry's 7.0x valuation today. Markets typically pay a premium for companies they expect to outperform in the near future, which is especially the case today considering earnings are this week.

Does Wall Street Agree With the Market's Premium Valuation?

Some analysts got ahead of the earnings curb for Taiwan Semiconductor stock’s earnings, particularly those at Susquehanna. As of August 2024, these were the latest set of analysts to express their views on the chipmaker’s price, reiterating a “Positive” rating alongside a $250 a share price target.

These are the outliers, above the consensus price target of $200 a share today. To prove these Susquehanna analysts right, Taiwan Semiconductor stock would have to rally by as much as 32% from where it trades today, not to mention a new all-time high valuation for the company.

Another gauge for investors to consider, which adds to the bullish evidence to support holding this stock through earnings, is the fact that the stock’s short interest has declined by 0.3% over the past month alone. This is part of a larger quarterly decline from $5.6 billion to $4.5 billion in short interest today.

Slowing finances don’t have the strength bears thought they had, a trend investors can confirm by looking at the premiums being paid for Taiwan Semiconductor stock today and the bearish capitulation over the quarter. Bullish factors outweigh the bearish ones, making this a stock to hold through the upcoming earnings announcement.

The article "Taiwan Semiconductor Stock: Buy Now or Wait for Earnings?" first appeared on MarketBeat.