Bet Big and Bullish on Under-Loved Taiwan Semiconductor Ahead of Earnings

TSM stock - Bet Big and Bullish on Under-Loved Taiwan Semiconductor Ahead of Earnings

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Semiconductor stocks have been hot this year — sometimes unreasonably so. But one semiconductor firm, in particular, has been overlooked by many … despite its supply deals with Apple (NASDAQ:AAPL).  It’s time to throw some love back to Taiwan Semiconductor Manufacturing Company (NASDAQ:TSM).

Since hitting a high north of $45 back in late January, TSM stock has been the dog of the semiconductor sector. The shares are down more than 20% during this period, compared to rallies in a majority of Taiwan Semi’s competitors, including Advanced Micro Devices (NASDAQ:AMD) and Micron (NASDAQ:MU).

There has been plenty of hype surrounding AMD and MU. Both are portrayed as clear leaders in both artificial intelligence (AI) and datacenter computing solutions.  Both also caught considerable heat when the smartphone market slowed down — well, moreso Micron.

Backlash Hits TSM Stock

In fact, this is the key kickback affecting TSM stock right now. Despite its contracts to supply chips for Apple iPhones, the overall slowdown in the smartphone market has driven investors away from TSM. That is about to change in two ways.

Like Micron, Taiwan Semi is diversifying away from the smartphone market. AI and datacenter computing are the next big thing in technology. AI rides on top of massively powerful computers and globally located devices — i.e., the Internet of Things. And Taiwan Semi is perfectly positioned to transition into a major role in this rapidly growing market.

Finally, the smartphone market is about to be revolutionized once again. Not by a smartphone maker, but by 5G wireless. The next standard in wireless is poised to compete directly with landline wireless internet access, with 5G speeds topping out near 4 gigabits per second.

That means new phones to handle the new 5G standard, and new devices to take advantage of all that speed. And 5G is expected to begin rolling out next year, with full national access by the end of 2020.

So, I’ve made the case for long-term investing in TSM — what about the short-term?

Taiwan Semi has you covered there as well. The company is about to report second-quarter earnings on July 19. Analysts are expecting a profit of 46 cents per share, up 6.9% from year ago results. Revenue, meanwhile, is expected to rise $7.85 billion.

TSM Stock
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Should Taiwan Semi surprise Wall Street and top these figures, there is a lot of penned up pessimism that could unwind in buying power. For starters, only one of the six analysts following TSM stock rate the shares a “buy,” leaving plenty of room for upgrades.

Technically, TSM stock is already in the process of coming back from Wall Street’s unnecessary beating. The shares are testing resistance near their 50-day moving average this week. A firm breakout above this trendline could bring technical buyers to the table and begin to thaw the bearish consensus outlook on the stock.

How much of a move can we expect from TSM? According to July options, implied volatility is pricing in a 4.7% move in TSM stock heading into earnings. This places the upper bound just shy of $40, and the lower bound near $36.

2 Trades for TSM Stock

Call Spread: Traders looking to bank on a post earnings rally for TSM stock might want to consider a July $39/$40 bull call spread. At last check, this spread was offered at 25 cents, or $25 per pair of contracts. Breakeven lies at $39.25, while a maximum profit of 75 cents, or $75 per pair of contracts — a potential 200% return — is possible if TSM stock closes at or above $40 when July options expire.

Put Sell: On the other hand, if you are looking for a less volatile trading strategy, then a July $35 put sell position should have you covered. At last check, this put was bid at 15 cents, or $15 per contract. In this trade, you keep the premium as long as TSM stock closes above $35 when July options expire.

On the downside, if MU trades below $35 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $35 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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