“Armchair Trader Series” Recommendations
- Week Beginning -
Monday,  January 04, 2021

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

ALSO

"Trading Capital Management"



Options Trade – Taiwan Semiconductor Mfg. Co. Ltd. (ADR)(NYSE: TSM) Calls

Friday, January 08, 2021

** OPTION TRADE: Buy TSM FEB 19 2021 130.000 CALLS at approximately $3.65. (Max. $4.00)

 Place a pre-determined sell at $7.30.

Also include a protective stop loss of $1.50.

Prelude.....

We executed an options trade on Taiwan Semiconductor Mfg. Co. Ltd. (ADR)(NYSE: TSM) — commonly referred to as TSMC — which has become the world’s largest contract chipmakers, back in September last year.

This was call option for January, 15, 2020, on the 85 Strike; and our pre-set sell point was quickly attained.

For those members that are still hanging onto the trade, as of yesterday, you would have been up 654%.

However, for new members, and for those that have already sold their previous option, there is a chance to continue profiting from TSM’s upward momentum.

Many of the top technology companies look to TSMC’s fabrication plants to manufacture their custom chips.

TSM stock has been on a growth path for the past decade, a rate that accelerated over the past five years. It’s had its ups and downs, but there’s no arguing with overall gains of nearly 300% since 2015.

Shares of Apple’s main chipmaker have rallied more than 70% over the past 12 months and reached a record high on Friday. The company has predicted that the industry “mega trends” of 5G and high performance computing-related products will continue to drive growth over the long term.

Where to Now.....

Revenue for Taiwan Semiconductor Manufacturing Company and other global foundries is expected to have reached US$84.6 billion in 2020, representing 23.7 percent year-over-year growth, the most in nearly a decade.

According to market research, demand for chips in the first half of 2020 was fueled by the COVID-19 pandemic, which affected purchases of products related to working from home and distance education. Growth in the second half of the year was attributed to demand for Huawei components caused by U.S. sanctions in addition to increased 5G smartphone sales and 5G base station build-outs.

It is predicted that chip sales in 2021 will continue to be driven by pandemic-related demand for networking products and the stay-at-home economy. Sales of smartphones, servers, notebooks, TV, and cars in combination with the continued rollout of next-generation networks, including 5G base stations and WiFi 6 technologies, are expected to push revenue for the foundry industry in 2021 to an all-time high of US$89.6 billion, or 6 percent year-over-year growth.

About TSM…..

Taiwan Semiconductor Manufacturing's has obtained lead in advanced semiconductor manufacturing over the past few years, and that lead only seems to be getting bigger. Last month, rival Intel, one of the last chipmakers that manufactures its own chips, admitted that it had run into a design flaw for its 7 nm manufacturing process, and would be falling some 12 months behind schedule. Intel had already ceded the leading-edge node lead to TSM in 2018, and that lead only seems to be getting bigger.

Advanced chip manufacturing is hard, but TSM's years of experience making a wide variety of semiconductors has given it a knowledge and process lead that other manufacturers are struggling to match. In fact, rival GlobalFoundries threw in the towel on competing with Taiwan Semi on the leading edge back in 2018. Intel itself even hinted that it may outsource some manufacturing going forward, likely to TSM. The U.S. government also recently subsidized TSM to build a new fabrication plant in Arizona on national security grounds.

It seems TSM has built itself a formidable moat in chip manufacturing.

Revenue Hits Record…..

Taiwan Semiconductor Manufacturing Co. reported record quarterly revenue, joining other Apple Inc. suppliers in signaling strong demand for the new 5G iPhones.

The world’s largest contract chipmaker said Friday that December sales totaled NT$117.4 billion ($4.2 billion). Revenue in the quarter reached a record NT$361.5 billion, according to Bloomberg News’s calculations based on previously released monthly sales figures. That came in slightly below the average estimate of NT$364 billion, which had risen in past months as expectations around the iPhone grew.

“Taiwan Semiconductor Manufacturing Co.’s 4Q revenue could exceed guidance of $12.7 billion on a continuation of strong chip orders from customers such as Apple and Advanced Micro Devices," Bloomberg Intelligence analyst Charles Shum and Simon Chan wrote in a note Wednesday.

Revenue for the entire year came in at NT$1.34 trillion, up roughly 25% from 2019. TSMC is scheduled to report quarterly profit on Jan. 14.

Other Influencing Factors…..

TSMC’s capacity utilization rate for advanced 5 nm processes and below is predicted to be around 90 percent due to U.S. sanctions barring Huawei subsidiary HiSilicon from purchasing TSMC chips. Meanwhile, Apple — TSMC’s main client for 5 nm chips — will be unable to make up for the loss of HiSilicon.

Utilization rates for TSMC’s 7 nm node are expected to be at full capacity through the second quarter of 2021 due to high demand from AMD and MediaTek.

Looking to the second half of 2021 through 2022, TSMC plans to expand its 5 nm capacities to meet demand for high-performance computing components in 2022. It is forecast that production capacities for advanced processes in 2022 will remain tight due to rapid growth in the high-performance computing market and increased Intel orders, which is expected to speed up the outsourcing of its production.

The company in 2018 manufactured 12-13 million 12-inch equivalent wafers. In 2018 its annual growth rate was 8%. In 2019 it was 2% and in 2020 it was 5%. The company has had steady mid-single digit capacity growth here. At the same time, the company has steadily moved to smaller wafers. In 2018, the company sold 41% <16 nm wafers. By 2020 it's expected to be ~55%.

That's expected to continue in subsequent years. It's not surprising with massive demand, Apple has already secured 80% of Taiwan Semiconductor Manufacturing's 2021 5 nm production.

Earnings…..

Taiwan Semiconductor Manufacturing last announced its earnings results on Thursday, October 15th.

The semiconductor company reported $0.90 earnings per share (EPS) for the quarter, missing the Zacks' consensus estimate of $0.92 by ($0.02). Taiwan Semiconductor Manufacturing had a return on equity of 29.40% and a net margin of 37.94%. The business had revenue of $12.14 billion for the quarter, compared to analyst estimates of $12.50 billion. Equities analysts anticipate that Taiwan Semiconductor Manufacturing will post 3.48 earnings per share for the current fiscal year.

Taiwan Semiconductor Manufacturing has managed to steadily increase its net revenue. 2019 net revenue was $38.2 billion versus 2020 net revenue closer to $48 billion. That drastic double-digit increase in revenue has come with strong margins for both 2019 and 2020. In 2019, the company's net income of $12.3 billion means a P/E of ~40.

Its double-digit growth into 2020 has decreased that P/E down towards 33. That's strong net income at a fairly reasonable valuation when its combined with the company's double-digit growth.

The company's YE 2018 cash balance was nearly $21 billion. In 2019, the company generated almost $22 billion in net cash and used $16.4 billion in cash for capital expenditures. That's massive significant capital expenditures showing the company's commitment. The company also used $9.6 billion or ~5% in shareholder rewards.

Its cash balance is still $16.3 billion, which is incredibly respectable. At the same time, the company's competitive position is being cemented by its continued capital investment. The company hasn't yet announced detailed 2021 plans, however, its capital expenditures are growing and the company is expected to announce $21 billion in 2021 capital expenditures.

The key takeaway here is that the company has been rapidly growing its revenue and cash flow, although capital expenditures mean that FCF will be minimal. With strong revenue in 2019 and 24% revenue in 2020, that can be expected to continue to comfortably cover the company's position. Samsung is planning to spend >$100 billion over 10 years to improve its position.

Analysts Positivity

Taiwan Semiconductor Manufacturing Company Limited has been given a consensus rating of "Buy" by the seven analysts that are currently covering the firm. One analyst has rated the stock with a sell rating and six have issued a buy rating on the company.

Separately, Zacks Investment Research upgraded shares of Taiwan Semiconductor Manufacturing from a "hold" rating to a "buy" rating.

Summary…..

Taiwan Semiconductor Manufacturing has a strong position in an industry where it has a significant ability to grow its net income.

Going forward, Taiwan Semiconductor Manufacturing has had strong recent double-digit revenue growth, which should continue. The company should be able to continue growing this revenue going forward with new 3 nm and other nodes.

Taiwan Semiconductor Manufacturing stock has a market cap of $584.83 billion, a P/E ratio of 35.69, a P/E/G ratio of 1.18 and a beta of 0.93. The company has a quick ratio of 1.26, a current ratio of 1.40 and a debt-to-equity ratio of 0.06. Taiwan Semiconductor Manufacturing has a twelve month low of $42.70 and a twelve month high of $114.95. The company's 50-day moving average price is $102.74 and its two-hundred day moving average price is $83.95.


Options Trade – Nio Inc – ADR (NYSE: NIO) Calls

Tuesday, January 05, 2021

** OPTION TRADE: Buy NIO FEB 19 2021 60.000 CALLS at approximately $6.10. (Max. $6.80)

 Place a pre-determined sell at $12.20.

Also include a protective stop loss of $2.45.

Nio Inc – ADR (NYSE: NIO) has stood out in a crowded field of EV stocks this year, challenging Tesla in China as its electric-car sales soared.

NIO is starting 2021 with record electric vehicle deliveries for its latest quarter — and the launch of a used car service and trading platform.

Separately on Sunday NIO announced record deliveries for December as well as 17,353 vehicles delivered last quarter, an increase of 111% year-over-year. Overall the company’s yearly deliveries rose 112% in 2020, to 43,728 vehicles.

NIO outperformed in 2020 among the EV players, with the stock up 1112.4%. Last year the company beat delivery estimates month after month. It also announced a liquidity injection over the summer, the launch of a battery subscription program, and indicated its planning to expand into Europe.

Analysts are bullish about overall China EV sales, adding further lift to NIO stock. JPMorgan expects EVs to make up 20% of the total China car market in 2025, quadrupling from under 5% in 2019. The costs of producing EVs and traditional vehicles will reach parity by 2023, driven by lower battery costs, the firm says.

Globally, Wedbush sees "a major inflection" of demand, with EVs going from 3% of total auto sales today to 10% by 2025. It says that will be driven by a "tidal wave of momentum" in China.

China wants EVs to be 25% of all new car sales by 2025. It is the world's biggest market for electric cars.

About Nio…..

Founded in 2014, the company originally operated under the name NextCar, changing it to NIO in July 2017. In its Chinese form, the name translates to "Blue Sky Coming," which stems from management's vision of a future with azure skies absent the pollution from

Raising $1 billion during its initial public offering, NIO debuted as a publicly traded company on the American market in September 2018. On its first day of trading, the stock opened at $6, closed at $6.60, and traded as high as $6.93 for a reasonable pop.

On Sept. 24, 2018, the company achieved a new Guinness World Record when Chen Haiyi from China ascended the Purog Kangri glacier in Tibet and reached an altitude of 18,751 feet in the NIO ES8, setting a record for the highest altitude achieved in an electric car. According to the company, the feat was meant to demonstrate the EV's prowess in high altitude and extreme cold.

While NIO's vehicles may only be seen on the roads of China, the company is drawing on talent from a worldwide pool of employees. In San Jose, California, for example, the company's North America headquarters is home to more than 500 employees who primarily focus on software development. According to the company, the London office works on "commercial Formula E [race car] management, strategic management, and our supercar development." Nearly 200 employees in the Munich office concentrate on product and brand design.

Influencing Factors…..

Monthly Sales Record

NIO said that it set another record for deliveries in December, after it successfully implemented a production boost earlier than it had planned ahead of rival Tesla's China launch of its Model Y SUV.

NIO delivered 7,007 vehicles in December, a new monthly record for the company and more than double its year-ago result, after boosting its production capacity in a bid to keep up with high demand for its upscale electric SUVs. That total included 2,505 examples of the EC6, a sporty crossover introduced in September that is now the company's best-selling model.

NIO's CEO, William Bin Li, had said during the company's third-quarter earnings call in November that it was working with suppliers to increase its monthly production capacity to 7,500 vehicles, and that it hoped to hit that production target early in 2021. But early in December, Li said that NIO was going to try to get that increase in place before the end of 2020, an effort that was clearly successful.

In a statement, Li said that over 40% of customers chose the company's battery-as-a-service subscription option in December. The option allows a customer to buy a NIO vehicle without a battery pack, at a reduced up-front price, if the customer purchases a subscription to NIO's battery-swap service.

NIO has over 150 automated battery-swap stations up and running in China; the stations can swap out a NIO's battery pack for a fully charged new one in about 3 minutes.

Nio Day Event

The annual Nio Day is scheduled for Jan. 9. The Nio Day, which is customarily a year-end event, was pushed back to 2021. It will be held at Wuliangye Chengdu Performing Arts Center with the theme of "Always Forward." Analysts expect Nio to expand its lineup of electric cars, including its first sedan models.

Expected announcements.....

Nio is on track to announce a few launches at the event, including its first sedan. This would be the company's fourth mass-produced model, with speculations suggesting it will likely have a coupe design like the Audi A7.

Deutsche Bank analyst Edison Yu expects the new sedan will be aimed at “the mid-size premium segment” and will be the first Nio vehicle to be built on the EV maker’s next generation NP2 platform.

According to reports, the new model will be called the EEV and although no official specs have been provided yet, Yu anticipates a “euro centric styling with a sporty front grill, long wheelbase (+3.000m), fast acceleration (0-100km in 400 miles, helped by use of silicon carbide), and a refresh of interior/cockpit.” Production is slated to begin in 4Q21 or early 2022.

It is also believed the company could start mass manufacturing the model by the fourth quarter of 2021.

Nio is expected to announce a 150 kilowatt-hour battery back that will likely increase the range of its EVs to over 900 kms.

The new pack is expected to be compatible with all existing Nio models.

Alongside the EE7’s unveiling, at the event Nio will also reveal its new autonomous driving platform. Named NT2.0, the platform will boast LiDAR sensors and feature Nio’s internally developed vision software. Yu says its introduction confirms his “earlier belief the company was looking to pivot away from Mobileye.”

The company says the platform will enable Level 4 autonomy in 2022 and will also come with 5G+V2X connectivity.

Finally, NIO will also present its new battery swapping tech which is expected to be “faster and cheaper than current stations,” and introduce a bigger 150 kWh battery pack which will eventually be available for all existing models.

Earnings…..

On Nov. 17, Nio beat estimates for the third quarter. Nio lost 12 cents a share as revenue more than doubled to $666.6 million. Vehicle margin expanded to 14.5% from -6.8% a year ago and 9.7% in Q2. Available cash more than doubled from Q2 to $3.3 billion in Q3. While earnings remain elusive, losses are narrowing.

Analysts expect Nio to pare losses to 67 cents a share in all of 2021, as revenue vaults 94%, according to Zacks Investment Research.

Analysts Positivity

Wall Street is growing more bullish on Nio. In October, Morgan Stanley called Nio a "strong EV leader in the making." The firm hiked its earnings forecasts and price target on Nio stock, citing strong sales momentum. Earlier in August, the firm saw an improved outlook for Nio earnings and cash flow.

Also in October, JPMorgan forecast Nio could take a massive 30% slice of the premium EV market. The firm cited, in part, the expected debut of a new affordable electric sedan. Nio currently sells the ES8 and ES6 electric SUVs, and a new EC6 electric crossover.

CEO William Li said Nio should reach annual production capacity of 150,000 units by the end of 2021. Longer term, Nio aims to double output to 300,000 per year.

Wall Street is optimistic about those targets. "We believe the company can achieve this using existing industry capacity instead of building a greenfield plant given rampant overcapacity in China, which should reduce its capex burden," Deutsche Bank analyst Edison Yu said in October.

Analysts are also bullish about overall China EV sales, adding further lift to Nio stock. JPMorgan expects the EV share of the total China car market to quadruple to 20% in 2025 from under 5% in 2019. The costs of producing EVs and traditional vehicles will reach parity by 2023, driven by lower battery costs, the firm says.

Globally, Wedbush sees a "a major inflection of EV demand," with electric vehicles ramping from about 3% of total auto sales today to 10% by 2025. For China, it sees a "tidal wave of momentum" heading into 2021.

Deutsche Bank analyst Edison Yu rates NIO a Buy, the recent strong rally has pushed the stock price slightly above his $50 price target.

The rest of Wall Street has similar expectations; the $50.20 average price target is nearly identical to Yu’s. All in all, the analyst consensus rates the stock a Moderate Buy, based on 8 Buys and 4 Holds.

Summary…..

In a "white hot" China EV market, domestic players such as Nio handily beat Wall Street's expectations, Wedbush analyst Dan Ives wrote Monday. He reiterated a prior view that global EV demand is "seeing a major inflection" into 2021.

"China remains a greenfield EV market opportunity as we believe EV sales can potentially double in the region over the next few years," he said.