TSMC, UMC defy chip gloom

Many analysts have downgraded the chip industry on concerns of excess chip supply and inadequate demand (see "Terrible week for tech stocks"). Apparently they forgot to tell TSMC and UMC.

The Taiwanese companies, the world's two leading foundry service providers, yesterday reported record-high July sales, confounding analysts' forecasts (see "TSMC, UMC July sales defy gloom, hit record highs")

"Neither Taiwan Semiconductor Manufacturing Co. (TSMC) or United Microelectronics Corp. (UMC) gave reasons for the strong numbers, but both have said the PC sector was showing signs of picking up in the current quarter," Reuters reported.

"The surprisingly strong results came as investors dumped semiconductor stocks, fearing a pile-up of chip inventory lower down the tech production chain would herald the start of a downturn for the cyclical industry."

The Reuters report also pointed out that the results were in line with the foundries' own estimates.

"TSMC had forecast third-quarter shipments to grow 4 to 5 percent from the April-June period, while prices would remain steady or even edge higher," it said.

"UMC, which is sprinting to catch up with TSMC, expected third-quarter shipments to rise 15 to 16 percent sequentially, while prices would gain 3 to 4 percent."

Nomura Securities analyst Rick Hsu rates TSMC shares a "strong buy" even though many peers have cut the issue to neutral ratings or worse.

Hsu said he saw a "big, big disconnect" between corporate fundamentals and share prices because of the market's worries about inventory. UMC is valued at 13.2 times historical earnings, compared to 13.95 for TSMC and 20.5 for Intel Corp.

TSMC Chairman Morris Chang had said in July that he expected inventory levels to go back to normal by the end of the year with continued growth for the semiconductor sector in 2005, scoffing at worries of a looming downturn.