It faces multiple headwinds, and Taiwan Semiconductor's stock price has recently fallen by 5%.

After Taiwan Semiconductor released its second-quarter financial report, its stock price dropped by about 5%, with mixed results. Specifically, this semiconductor manufacturing giant is currently facing several industry headwinds, leading to unstable demand dynamics, which in turn has a negative impact on its short-term financial situation.

In the remaining time this year, despite facing such pressure, Taiwan Semiconductor is expected to see substantial improvements starting from next year. As macroeconomic uncertainty gradually eases, semiconductor demand will regain vitality, and the performance of the semiconductor industry as a whole is expected to rebound strongly. $Taiwan Semiconductor (TSM.US)$Taiwan Semiconductor may continue to face such pressure in the future, but it is expected that the situation will substantially improve starting from next year. As macroeconomic uncertainty gradually eases, semiconductor demand will regain vitality, and the performance of the semiconductor industry as a whole is expected to rebound strongly.

Overall, I believe that the stock price of Taiwan Semiconductor (TSMC) is at a significant discount compared to the company's future profit growth expectations. This may indicate that the recent decline in stock price is a good opportunity to buy the company's stocks. Therefore, I am bullish on TSMC stocks.

Due to the semiconductor industry experiencing a downturn, TSMC's business has recently faced some challenges. As a leading semiconductor foundry, TSMC has helped global technology companies such as Apple, Qualcomm, and AMD push their chips into reality using its proprietary technology. $Apple (AAPL.US)$ Apple, $NVIDIA (NVDA.US)$ Qualcomm, and AMD, among the largest technology companies in the world.

The current short-term downturn may be attributed to the combined effect of multiple factors, including soaring inflation rates, geopolitical issues, and the lingering effects of the previous surge in consumer electronic device purchases due to the pandemic.

The complex interaction of these situations has led to increased uncertainty in the macroeconomy, a decrease in consumer spending, and significant fluctuations in semiconductor demand. In addition, the spending on consumer electronic products such as PCs, smartphones, and tablets has decreased, further affecting the semiconductor demand that powers these devices, ultimately impacting TSMC's performance.

Due to the above-mentioned challenges, TSMC's financial situation declined in the second quarter. In particular, the company's second-quarter revenue decreased by 6.2% compared to the previous quarter, to $15.7 billion, a year-on-year decrease of 13.7%. The global economic conditions have suppressed demand in the end-market, resulting in adverse adjustments to TSMC's customer inventory.

In addition, TSMC's gross margin has also continuously declined by 220 basis points to 54.1%, primarily reflecting a decrease in capacity utilization rate and an increase in electricity costs. However, it is fortunate that stricter cost control and more favorable exchange rates partially offset some of the challenges. Nevertheless, despite the industry being in a cyclic downturn, TSMC continues to invest in the development of N3 and N2 technologies, further compressing its operating margin by 350 basis points to 42%. As a result, TSMC's earnings per American Depositary Receipt (EPADR) per share declined by 26.5% to $1.14 compared to the previous year.

The soft environment in the semiconductor industry is expected to continue into the second half of this year. TSMC's management expects the company's revenue in the third quarter to be between $16.7 billion and $17.5 billion, with a quarter-on-quarter growth of 9.2% but a year-on-year decrease of 14.9% compared to last year's $20.2 billion.

In addition, the company's gross margin is expected to be between 51.5% and 53.5%, and its operating margin should be between 38% and 40%. This indicates that both TSMC's gross margin and operating margin will further decline compared to the previous quarter's 54.1% and 42.0%. Compared to the third quarter of 2022, where the gross margin and operating margin were 60.4% and 50.6% respectively, TSMC's gross margin and operating margin will decrease significantly.

However, with the alleviation of macro challenges, it is expected that TSMC's performance will improve in the near future, and the industry will also overcome its current downturn. It is expected that TSMC's management will express optimism about the outlook for the fourth quarter, with expectations of a significant increase in TSMC's 3nm production, which will raise its gross margin by three to four percentage points compared to the third quarter. In addition, TSMC's management expects the company's long-term gross margin to reach 53% or higher, indicating a possible recovery in its profitability.

This expectation is also reflected in Wall Street's views, and these forecasts also seem to indicate the recovery of the semiconductor industry. Although TSMC's ADR earnings per share for the 2023 fiscal year are expected to decrease by about 25% compared to the previous year, it is projected that by the 2024 fiscal year, the company's ADR earnings per share will rebound strongly by 24% to reach $6.12. Furthermore, by the 2025 fiscal year, TSMC's ADR earnings per share are projected to grow significantly by 34% to reach $8.19.

Such drastic fluctuations in profitability highlight TSMC's highly cyclical business model. Therefore, investors are reminded that this seemingly unfavorable performance of TSMC this year is a typical market reaction and should not be overly concerned.