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- 📈 TSMC Surges 5%, Fueling AI Confidence
📈 TSMC Surges 5%, Fueling AI Confidence
But one expert warns the market has 'invincibility syndrome'...
Maxwell Nicholson
October 20, 2024
TOP STORY
📈 TSMC Surges 5% After Earnings, Fueling AI Confidence
😰 In early September, the markets had their worst week of the year, sparking fears of impending doom and panic selling…
📈 In the last 6-weeks since then, the market has gone on an incredible rally, closing this week on the longest ‘win streak’ of the year, with the S&P and Dow setting new all-time highs.
🤩 A big driver of this week’s growth was an incredible earnings report from Taiwan Semiconductor ($TSM), fueling AI & tech optimism as we enter into Big Tech earnings season.
🤔 If you’re confused by the markets whiplashing from bullish to bearish, you’re not alone. Depending on where you look, you may see wildly different outlooks. For example, check out these two takes from commentators this week:
“It’s just the beginning for the “insane” demand for all things AI”
“Stocks are nearing a major peak and a more 'disturbed' period of weak returns is ahead”
🐝 So, for this week’s Buzz, let’s unpack TSMC earnings, what this means for the broader market, and break down the bull and bear case so you have all the facts to build your own opinion/perspective on the markets!
🐂 Bullish means someone is optimistic and beleives the markets/stock will go up. 🐻 Bearish means they beleive the markets/stock will go down.
🤖 TSMC Says “The AI Boom is Real” After Incredible Earnings
In case you’re not familiar, Taiwan Semiconductor is a critical company in the AI race. While companies like Nvidia design the GPUs that are used to train AI models, TSMC actually builds them.
As the CEO puts it, “almost every AI innovator” relies on TSMC to make its custom semiconductor chips, boasting Apple and Nvidia as its two largest customers.
This week, Taiwan Semiconductor (TSMC) jumped over 5% after earnings, and for good reason. The company smashed earnings, significantly beating analyst forecasts:
💰 Revenue rose 39% to $23.5B USD, beating forecasts by +1%
🤑 Profits rose 54% to $10.1B USD, crushing forecasts by +15%
📈 TSMC expects AI-related server revenue to triple this year as the company dominates competitors like Samsung and Intel, who’ve struggled to advance their chip technology.
The CEO is confident the good times will continue, as companies continue to invest tens of billions in AI infrastructure, saying:
“One of my key customers said the demand right now is insane, it is just the beginning”
🚀 TSMC Earnings Fuel AI Confidence
The TSMC CEO wasn’t the only one making big, bullish claims about AI this week.
🎯 No doubt driven in part by TSMC’s earnings, the Bank of America raised its price target for Nvidia from $165 to $190 - implying a 38% upside on the current value.
“Nvidia is a generational opportunity. As AI models continue to grow rapidly, the need for computing will only grow”
And the Bank of America isn’t alone. Most analysts are still very bullish on AI and Nvidia, with an average $152.86 price target according to TipRanks, 10% above the current price.
Hedge funds are also optimistic, with this week setting a 5-month record for tech investments.
🤑 But not everyone is so confident… and with the Fear & Greed index (which you can now see on Blossom) flashing the ‘extreme greed’ indicator, it’s healthy to feel a bit skeptical.
🏠 So before you bet the house on TSMC, Nvidia, or other AI stocks, let’s take a look at the bear case…
But first, a word from our incredible and long-time Weekly Buzz sponsor, Harvest ETFs!
🌼 The Blossom community was bearish (or at least collecting profits) on TSM this week, with the stock ranking as the #32nd Most Bought and the #14nd Most Sold. TSM is the #78th most held stock in the community.
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THE BEARISH CASE
🐻 Is the Market Suffering From ‘Invincibility Syndrome’?
🤔 Despite TSMC’s great earnings results, not everyone is so optimistic as we enter big tech earnings season.
🐻 One notable bear, the CIO of the $40B investment firm Calamos, says the market is suffering from ‘Invincibility Syndrome.’
The most significant feature of this investment year is the perception that US equities are virtually invincible. This historically signals a crescendo when markets are in the process of summiting a major peak.
🫧 Daniel Pronk, a respected YouTube commentator, also issued a ‘Bubble Alert,’ highlighting what he calls the “Shocking Reality Behind Today's Stock Prices.”
📊 Both Pronk and Grant’s arguments point to a lot of the same key facts:
As of Sep 30, 2024, the forward price-to-earnings (P/E) ratio (a measure of how expensive stocks are) of the S&P 500 was 21.5x, 16.73% above its 30-year historical average P/E ratio of 16.7x.
The market has only ever reached that high of a valuation two times in the past 30 years: right before the COVID-19 crash and the tech bubble.
The top 10 stocks in the S&P 500 have a forward P/E of 30.5x, compared to their historical average of 20.5x, and currently make up about 36% of the S&P 500, the highest concentration in 30 years.
Historically, when the market trades at a forward P/E of 21.5x, average one-year returns are approximately 0%.
🙋♂️ Pronk is quick to highlight that this doesn’t mean he thinks a crash is imminent, but rather that investors should “lower their expectations for future returns” as the “massive returns we’ve seen over the past 18 months are unsustainable.” (The S&P 500 is up 34.4% over the past 18 months, much higher growth than historical averages).
🌍 Daniel Pronk also suggests there may be more opportunity in international markets, which are trading at a 36% discount to the US - the lowest relative price in 20 years.
🧐 My Thoughts
As I’ve said before in the Buzz, I tend to agree that the market is most likely in a bubble, but that it’s impossible to know when (or if) that bubble will pop.
There is so much optimism around AI, and so far, I don’t really see too many signs of that slowing. The earnings of companies like Nvidia and TSMC will continue to grow massively as long as the tech giants continue to invest billions into AI infrastructure, and the tech giants will continue to invest billions into AI infrastructure as long as investors continue to reward them for doing so.
The problem is that the returns on these AI investments have not yet materialized, with Mark Zuckerberg admitting that tech companies are essentially in an AI arms race, but how long will that arms race last?
In the 2000 dot-com bubble, the bubble burst after tech companies started to miss earnings estimates, and the Fed started raising interest rates, causing investors to lose optimism and start rapidly selling tech stocks, crashing the market.
But after the bubble burst, the internet did go on to become transformational, and despite companies like Amazon crashing by over 90%, many of the key internet players are now the world’s most valuable companies (although many other internet companies like Pets.com went bankrupt).
The big question for me then is will investors start demanding a return on the AI investments before these massive investments start to pay off? If they do, it could spell trouble as the market is heavily reliant on this AI optimism to continue.
🌼 I’d love to hear the community’s thoughts on this question, so I’ve posted a discussion thread on Blossom to get the conversation going!
🎙️ We’ll also be hosting a live stream with Braden Dennis and Daniel Pronk on this exact topic on Nov 5 - the registration link will be posted on Blossom this week, so stay tuned! 😎
IN THE NEWS
🚨 Other Key Headlines This Week
📈 Netflix jumped 11% after strong Q3 earnings, with its ad-supported membership surging 35% from last quarter (full story here).
😰 ASML Holding (another semiconductor giant) crashed 15% as the company lowered its 2025 revenue outlook from ~$40B euros to ~$30B euros, citing a ‘slower recovery’ in its non-AI business lines (full story here).
📊 Robinhood announced plans to launch futures contracts in an effort to attract more sophisticated investors. The stock has surged 116% year-to-date (full story here).
🇯🇵 The Asia-Pacific markets are set for their biggest IPO week since 2022, with 20 companies expected to list. Most notable is Tokyo Metro which will be Japan’s largest IPO in six years (full story here).
🕵️ TSMC is under investigation by the US Department of Commerce as to whether the company is violating the US ban on Huawei by secretly selling them AI chips (full story here).
FROM THE BLOSSOM COMMUNITY
⭐️ Featured Discussions this Week
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