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: Have semiconductor companies’ performance decoupled from the economy? Taiwan Semi earnings say yes, but we’ll get a clearer picture soon

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Sentiment around technology and growth has sunk as rising interest rates, persistent inflation and a less accommodative Federal Reserve have sent investors running for safer bets.

Although the fourth quarter delivered a wave of record earnings results from tech giants and semiconductor companies, the macroeconomic environment and geopolitical landscape have become increasingly bearish.

With the next wave of technology earnings for U.S.-based tech companies set to start reporting this week, you can be sure investors are looking to see just how deflationary technology can be. 

If you are looking for a preview into what lies ahead for chipmakers, perhaps you only need to look as far as Taiwan Semiconductor Manufacturing
TSM,
+0.09%
,
which reported last week, giving a preview into semiconductor demand.

Taiwan Semiconductor as leading indicator

TSMC, which handled an estimated 55% of the global foundry market in 2021, outpaced profit and revenue forecasts in the first quarter. It delivered $1.40 per share and $17.57 billion in revenue against targets of $1.27 and $16.74 billion. The results reflect a 47% jump in earnings and a 36% increase in sales. The company also raised revenue guidance for its next quarter.

However, despite this robust demand and guidance, TSMC and many of its biggest customers have seen significant selloffs, with prices for AMD
AMD,
+2.82%
,
Qualcomm
QCOM,
+1.25%
,
Nvidia
NVDA,
+2.28%

and itself down 30% or more off highs. Investors are effectively betting that the expected slowdown in economic activity and rising rates will likely hamper these companies’ growth. 

Momentum remains high 

TSMC manufactures about 90% of the world’s leading-edge chips, representing about 50% of its wafer revenue in the most recent quarter. Momentum in secular trends such as artificial intelligence (AI), intelligent vehicles, 5G and mobility are serving as tailwinds. 

TSMC expects demand in automotive and high-performance computing to be sustained. Bumps from smartphone cycles will come throughout the year, most notably from Apple
AAPL,
+1.22%
.
 

Semiconductor stocks reflect pessimism 

The external forces of the market are dragging on share prices across everything tech and growth. There is no real surprise, as the market’s reaction has been historically consistent when interest rates rise. With other significant concerns, it tends to weigh even harder on technology. 

However, the semiconductor market outlook appears to be more robust as semiconductor volume grows to support many business and consumer trends. And when semiconductor volumes increase, the adjacent technologies they support tend to rise with it. This means companies in cloud computing, software as a service (SaaS), PCs, mobile devices, AI, 5G and automotive, among others, are likely all doing better than expected. 

While TSMC’s results cannot dictate the shape and direction of tech and semiconductors, it provides several key indicators of the genuine demand for technology products and solutions in the market. And based on this quarter’s results and its guidance, it appears that demand for technology is stable even if the macroenvironment is not.

That’s a further indication that the deflationary properties of technology will continue to outperform no matter how negative the sentiment toward it becomes. 

Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advising or consulting to Nvidia, Intel, Qualcomm and dozens of other companies. Neither he nor his firm holds any equity positions in companies cited. Follow him on Twitter @danielnewmanUV.

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