Despite some weakness early in the week, the indexes bounced back in a big way, closing at new all-time highs. For the week, the S&P 500 gained 1%, the Dow added 1.07%, and the Nasdaq soared higher by 2%.
The Stock – Taiwan Semiconductor (TSM)
Why the Strength
Taiwan Semiconductor is the world’s largest dedicated pure-play semiconductor foundry, and its chips are widely used in devices made by Tesla, Nvidia, Apple and other giants. The company had what it described as a “challenging” 2023 due to industry-related setbacks and a slowdown in smartphone demand, but management is predicting stronger growth rates in 2024, supported by a ramp of its industry-leading three- and five-nanometer technologies and “robust” artificial intelligence demand.
Last week, Taiwan Semi reported Q4 revenue of $20 billion that was essentially flat compared to a year ago, but it beat estimates by 3% and was 14% higher from Q3. Earnings of $1.50 beat estimates by eight cents and were 19% higher sequentially (both reasons for the stock’s strength). By segment, three-nanometer process technology contributed 15% of wafer revenue in Q4, while five-nanometer and seven-nanometer accounted for 35% and 17%, respectively; thus, Advanced Technologies (defined as seven-nanometer and below) accounted for 67% of wafer revenue.
The biggest reason for the stock’s strength, though, was the outlook—the top brass said the slowdown was over and that revenue should grow by around 20% annually for the next few years, prompting several Wall Street institutions to increase price targets for Taiwan Semi. The expansion is expected to result from soaring demand for AI chips, with generative AI likely to provide a long-term growth runway in the coming decade (indeed, the market opportunity for GenAI hardware is projected to rise at a torrid 33% annual growth rate). Analysts see 20%-ish top- and bottom-line growth for 2024 and 2025, and many think even that will prove low as the next chip upcycle gets going.
Technical Analysis
Despite an industry-wide slump in 2023, TSM bottomed in 2022 and managed a solid rally into June, rallying up to 110 on hopes for an industry turnaround. Perception waned with the market in the summer and fall, but the stock used that time to build a great-looking launching pad, with many weeks of accumulation (up on above-average weekly volume) and some tight trading, too. And now we have the breakout, with TSM soaring last Thursday and Friday on huge volume to two-year highs. Stop — 99
The Covered Call Trade
Buy Taiwan Semiconductor (TSM) Stock at 114, Sell to Open February 114 Strike Calls (exp. 2/16) for $3, or a Net Price of 111 or less
Static Return: $300 per covered call (2.7%)
Breakeven: 111
Covered Call Return (if assigned): $300 per covered call (2.7%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 111 or less. (In this case 114 minus 3 = 111. Or another example is you could pay 114.25 for the stock and sell the call for 3.25, which also equals 111).
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on January 30, 2024.
