The market is overly concerned! Morgan Stanley: Intel's foundry "competition illusion" is actually a positive for Taiwan Semiconductor

According to the Zhitong Finance APP, recent rumors about the revival of Intel's (INTC.US) foundry have negatively impacted Taiwan Semiconductor (TSM.US), with investors concerned about intensified competition among foundries. However, JP Morgan believes that the "competitive illusion" of Intel's foundry is actually more beneficial for Taiwan Semiconductor. The bank has given Taiwan Semiconductor an "overweight" rating, with a target price of NT$1,275.

In the past two weeks, Intel has made significant progress. Reports indicate that the U.S. government intends to take a stake in the company, and SoftBank has also invested $2 billion, while there are indications that key customers may participate in the rescue of Intel's wafer fabs. U.S. Secretary of Commerce Gina Raimondo has stated that the U.S. cannot rely entirely on Taiwan Semiconductor to meet all its advanced chip supply needs and hopes to see more capacity relocated back to the U.S. in the future. The market initially perceived these events as having a negative impact on Taiwan Semiconductor, but JP Morgan holds a different view.

JP Morgan stated that the "selective" illusion is more beneficial for enhancing Taiwan Semiconductor's price-to-earnings (P/E) multiple than an absolute dominance. In the second half of 2020, Taiwan Semiconductor's P/E ratio reached 25 to 30 times, when there were expectations that Intel would massively outsource its business to Taiwan Semiconductor. Aside from the initial excitement phase, claims that Taiwan Semiconductor might become a monopoly in the leading foundry sector did not significantly increase the company's P/E ratio.

JP Morgan believes that a potential monopoly status would only intensify regulatory pressure and highlight geopolitical risks, which typically lead to downward adjustments in P/E ratios. Having a relatively weak competitor in the leading foundry sector, thereby providing customers with an illusion of choice, may be a more ideal situation for Taiwan Semiconductor, as it could alleviate ongoing regulatory pressures and the pressure to bring business back to the U.S.

JP Morgan also stated that customer participation in Intel's foundry revival plan should not be viewed entirely as a negative factor. The market is likely to see the involvement of major Taiwan Semiconductor customers like Apple or Nvidia in the potential rescue plan for Intel's foundry as a clear negative event, as it would substantially harm Taiwan Semiconductor's market share. However, JP Morgan believes that no matter how many customers support it, the conflict of interest between products and foundries cannot be resolved. Therefore, JP Morgan believes that Taiwan Semiconductor will still maintain over 90% of the leading node market share for the foreseeable future. In the current international political environment, the costs associated with a 100% market share may outweigh the benefits that Taiwan Semiconductor could gain.

JP Morgan emphasized that the challenges facing Intel's foundry business are not just financial; the fundamental challenges lie elsewhere. JP Morgan believes that foundries require a very different corporate culture, service mindset, focus on cost efficiency, and customer-centric innovation, which are difficult for Intel, which has long focused on products, to achieve in a short time.

Additionally, reports suggest that the U.S. government may convert part of the funding from the CHIPS Act into equity stakes in participating companies, which means that Taiwan Semiconductor may need to sell a small portion of its equity to the U.S. government. Given the current scale of funding from the CHIPS Act, JP Morgan believes that this sale proportion may be very small (no more than 1% equity) and is unlikely to significantly change Taiwan Semiconductor's strategic direction. JP Morgan also believes that despite facing pressure from the U.S. government, Taiwan Semiconductor is unlikely to participate in the operation of Intel's factories or share intellectual property or technology with Intel's foundry Overall, JP Morgan believes that geopolitical factors will trigger short-term fluctuations, but Taiwan Semiconductor's fundamentals remain strong, with upside potential