Source: Beast Finance Author: Beast Finance
Summary:
(1) TSMC’s stock price has fallen 18% from its highest point, and many options traders are betting that TSMC’s stock price will fall further.
(2) Wall Street analysts have also lowered TSMC’s revenue and profit expectations.
Taiwan Semiconductor Manufacturing Company (TSM)'s stock price has recently fallen back to pre-May levels, and many options traders are betting that TSMC's stock price will fall further in mid-October.
TSMC shares have been trading at a premium above the normal premium for its shares on the Taiwan Stock Exchange. Beast Finance believes that this may be the reason why options traders are betting that TSMC’s stock price will fall further, or that TSMC’s fundamentals will continue to face challenges.
From October 2022 to May 2023, the average premium between TSMC's shares and American depositary receipts (ADRs) on the Taiwan Stock Exchange was about 3.9%. As of today, that premium has risen to about 7%. Assuming this spread will return to pre-AI craze levels, the stock could fall to around $85 from its current level of $91.225.
This forecast is based on the current spot exchange rate of NT$32.03, and the fact that 1 ADR share is equivalent to 5 shares of TSMC on the Taiwan Stock Exchange, where TSMC’s current share price is NT$550.
Additionally, Wall Street has lowered TSMC's revenue forecasts for 2023 and 2024. Interestingly, the downward trend in TSMC's stock price preceded Wall Street's predictions, and may also be more severe than Wall Street expected. Specifically, TSMC’s valuation has fallen to 4 times its 2023 sales forecast, which is close to the low end of TSMC’s historical valuation range since 2013.
However, TSMC shares have rebounded sharply since hitting lows in October last year. The ongoing AI boom, while boosting many stocks in recent months, does not appear to have improved TSMC's prospects for 2024, as market forecasts for TSMC's sales continue to trend downward. So even though TSMC is a major supplier to companies like Nvidia (NVDA) and Advanced Micro Devices (AMD), its stock price may not see the same moves as Nvidia's shares have done this year.
Data suggests that much of the recent rise in TSMC's stock price may lack a solid foundation. While the stock appears cheaper on a price-to-sales basis compared to levels during the 2021 COVID bubble, it's not necessarily cheap from a historical perspective. This observation may prompt traders to bet on put options expiring on October 20. According to Trade Alert data, open interest in the $65 and $70 puts, which are priced at $0.13 and $0.24 per contract respectively, has increased by about 12,000 units in recent days.
While the total fee paid was less than $500,000 and was a relatively small deal, it looked more like a directional trade betting the stock would fall. If TSMC shares continue to fall, the premiums on these puts may begin to rise, allowing traders to sell the puts before the put's strike price is reached.