Shares of TSMC (TSM) and other semiconductor manufacturers came under significant pressure last week, primarily due to reports that the U.S. is contemplating stricter trade restrictions to limit China's access to advanced chips.
The Biden administration is reportedly considering more stringent measures if companies like Tokyo Electron, and ASML (ASML) continue to supply advanced semiconductor technology to China.
The resulting geopolitical tensions have raised concerns that the AI-driven growth of tech stocks might come to a halt, causing chipmakers' shares to tumble and wiping nearly 10% off the Philadelphia Semiconductor Index (SOX) over the past five sessions.
However, analysts at Lynx Equity Strategies believe last week's sell-off "is likely to reverse somewhat this week."
"The SOX (vs. SPX outperformance) has cut below a reliable level. The fate of the sector will of course be decided by the earnings reports, the bulk of which arrive only next week,” they added.
Lynx Equity Strategies provided two fundamental reasons for their view: first, TSM has made strategic moves to largely insulate itself from U.S. policy towards Taiwan, suggesting last week's sell-off in TSM could reverse. Second, in an election year, it is too late for the current administration to implement significant changes to U.S. trade policies, indicating that the sell-off in China-exposed semiconductor and hardware names could also revert.
“As such we think investor fears of draconian changes to US policy towards China exports by US and non-US based companies is likely to ebb. We would be buyers of semis/semicap names,” analysts said.
As for TSM specifically, the chipmaker’s status as a foundry can no longer be seen as purely offshore, analysts pointed out. The Phase 1 fab of TSM’s Arizona project is already running pilot wafers.
"Of all the CHIPS Act based initiatives promoting US-based fabs, TSM’s AZ project is the first to be up and running actual wafers,” analysts wrote. "This offers TSM leverage in geopolitical negotiations whosoever occupies the White House next year."
With the AZ fab now operational and running wafers at 5nm, TSM has gained credibility with U.S. government agencies. Also, while Intel's (NASDAQ:INTC) CEO has emphasized the need for new U.S.-based fabs, TSM is the first to deliver, analysts at Lynx Equity Strategies explained.
"In our view, once released into production next year, TSM’s AZ fab is likely to run AI wafers. This enhances the importance of TSM to U.S. interests. We would be buyers of TSM."