Today, as Wall Street gears up for the commencement of the third-quarter earnings season, the spotlight is on two major technology giants—Taiwan Semiconductor (TSM) and Netflix (NFLX). Delving into the rationale for investors to dive in prior to their imminent earnings disclosures and hold steadfast.
Wall Street stood still in anticipation on Wednesday and Thursday, monitoring the unfolding scenario surrounding the Israel-Iran conflict and the evolving dockworkers’ strike. Amidst a traditionally weak October during election years, brace for potential volatility and selling leading up to the upcoming presidential election.
Irrespective of the political climate, investors restlessly chase returns. The market, indifferent to political affiliations, shows in the numbers. Through the Trump and Obama administrations, annual stock market returns hovered near identical figures at 16.0% and 16.3%, showcasing a realm where market forces trump politics.
The imminent trigger likely to sway markets is the approaching third-quarter earnings season. With consumer pressures in mind, the Tech and Finance sectors emerge as beacon sectors, garnering positive estimate revisions for the quarter, placing the onus on big tech firms to deliver. These two spotlight companies have witnessed stellar growth over the past decade, with revving earnings estimates from a year ago.
Taiwan Semiconductor: A Premier Tech and AI Investment
On Thursday, October 17, Taiwan Semiconductor Manufacturing Co. (TSM) unveils its Q3 2024 earnings. Taiwan Semi represents a bedrock investment in an array of technologies, spanning data centers, semiconductors, smartphones, artificial intelligence, and beyond.
Staking claim to building cutting-edge chips in the market, Taiwan Semi’s client roster boasts names like Nvidia and Apple. With a strategic focus on ramping up 3-nanometer chip production, Taiwan Semi commands 61% of the semiconductor foundry market share, leaving rivals in the dust.
Operating on a semiconductor foundry-only model, Taiwan Semi emerges as a formidable force in the tech realm, expanding its moat and geographical foothold to assuage geopolitical concerns. With a beat-and-raise second quarter behind it, Taiwan Semi projects a sales growth of around 24% for the next two fiscal years, coupled with robust adjusted earnings and encouraging EPS revisions, earning a Zacks Rank #2 (Buy).
Taiwan Semi’s stock has outperformed the Zacks Tech sector by a whopping margin over the past decade, recording a 73% year-to-date surge compared to Tech’s 23%. Trading 16% below its average price target, the stock sits at neutral RSI levels despite hovering near all-time highs, trading at a discount to its 10-year highs.
Netflix: A Paradigm-Shifting Streaming Titan
On the same day as Taiwan Semi, Netflix (NFLX) will announce its Q3 results. Renowned for revolutionizing the entertainment sphere, NFLX’s first-mover advantage and burgeoning content repository have catapulted it to preeminence in the streaming domain.
Netflix’s Dominance in the Streaming Industry Continues Unabated
For Netflix, the streaming game is not just about being in the audience; it’s about owning the stage. The entertainment giant, with its foray into live sports, reality TV sagas, and Hollywood blockbusters, has established a firm grip on the throne of the streaming TV kingdom. Despite the looming shadows of entertainment behemoths like Disney and tech titans like Apple and Amazon, Netflix’s crown remains untarnished.
Subscriber Surge and Growth Trajectory
In the fourth quarter of 2023, Netflix added a staggering 13.1 million net new paid subscribers, a feat only eclipsed by the subscriber boom witnessed during the onset of the pandemic in Q1 2020. As of the second quarter of FY24, Netflix boasts 277.7 million subscribers, marking a significant 17% year-over-year surge. The streaming service’s ad-based tier is also witnessing a robust uptrend, expanding its membership by 34% quarter-on-quarter.
Financial Fortunes and Market Sentiment
Projections indicate a sunny outlook for Netflix’s financial health. The streaming juggernaut is expected to elevate its subscriber base by 14% in the upcoming quarter, translating to a revenue surge of 15% in 2024 and a further 12% in 2025. Analysts foresee a substantial uptick in adjusted earnings, with a 59% growth anticipated in 2024 and an additional 19% uptrend in the subsequent year.
Market Performance and Future Prospects
In the market arena, Netflix’s stock has been nothing short of a rocket ship. Over the past decade, its shares have skyrocketed by a jaw-dropping 1,000%, outpacing its tech sector peers threefold. The trend continued with a 200% surge in the last two years alone, as the stock triumphantly eclipsed its 2021 peaks in recent months. The big question lingering is – can Netflix’s stock soar even higher with a stellar performance that meets or exceeds Wall Street’s expectations?
Valuation and Investment Potential
Despite its meteoric rise, Netflix’s valuation remains grounded. The stock is currently trading at a significant discount of over 90% from its all-time highs and sits comfortably below its 10-year median valuation by 50%, boasting a modest 32.6X forward earnings multiple.