Failure of Taiwan’s semiconductor surge? Check out United Microelectronics

Thanks to the artificial intelligence (AI) trend, the semiconductor industry is on fire. Semiconductor stocks in the computer and technology sector are benefactors. Foundries contracted for chip production also recorded double-digit revenue growth. The leading semiconductor manufacturer with 80% market share is Taiwan Semiconductor Manufacturing Ltd. Co. New York Stock Exchange: TSM. The dominance has been reflected in its 37% year-to-date (YTD) rising performance. Risk-on investors who don’t want to chase performance but are willing to take a chance on an underperformer that could set themselves up for a delayed rally can take a look at United Microelectronics Co. New York Stock Exchange: UMC.

A cheaper version from Taiwan Semiconductor

United Microelectronics is also a foundry based in Taiwan. They produce semiconductors built to specifications designed by other semiconductor companies, which include well-known customers such as QUALCOMM Inc. NASDAQ:QCOMBroadcom Inc. NASDAQ: AVGO and Cisco Systems Inc. NASDAQ: CSCO, Xilinx. United Micro provides high-volume, cost-effective manufacturing services that reduce capital expenses for its customers, as building in-house foundries can cost billions of dollars and take years to build.

Differences between Taiwan Semi and United Micro

While Taiwan Semi is a market leader for advanced chips focused on producing cutting-edge chips at a premium price for companies such as Advanced Micro Devices Inc. NASDAQ:AMD and NVIDIA Co. NASDAQ:NVDA, United Micro focuses on providing more cost-effective solutions for less complex, low-end chips. Rather than competitors, Taiwan Semi and United Micro are complementary contract chip manufacturers. Taiwan runs advanced, high-end, cutting-edge chips with the highest performance, while United Micro runs low-end, affordable, high-volume chips with mature processes.

Weekly ascending triangle pattern

The weekly candlestick chart for UMC illustrates an ascending triangle pattern. Flat upper horizontal trendline resistance has formed at $8.50. The ascending trend line formed at $5.08 on October 3, 2022, representing higher lows on pullbacks as the trend lines converge at the apex point. The channel continues to narrow, awaiting a break through the flat-top trend line above $8.50 or a break below the ascending trend line. The weekly relative strength index (RSI) is hovering just above the 50 band. Pullback support levels are at $7.48, $6.73, $6.14, and $5.51.

Weak performance in Q4 2023

On January 21, 2024, United Micro reported earnings of 17 cents per share, beating consensus estimates by a cent. Revenue fell 20.86% year over year to $1.76 billion, beating consensus estimates of $1.9 million. Gross margin was 32.4%, with operating margin at 22.6%. Revenues related to 22/28 nanometer wafers represent 36% of revenues. The capacity utilization rate was 66%. Net income attributable to shareholders was $430 million.

Co-Chair Insights

United Microelectronics co-president Jason Wang commented that fourth-quarter macroeconomic conditions were challenging, as evidenced by the prolonged inventory correction in the chip industry. Shipments of semiconductor wafers fell 2.5% quarter-on-quarter, while manufacturing facility utilization rates fell 66%. Wang noted that the company has proven resilient as it has safeguarded structural profitability with a gross margin of 34.9% even as utilization rates have declined significantly.

Wang concluded: “Looking ahead to the first quarter of 2024, we expect overall wafer demand to increase slightly. However, customers maintain a cautious approach in managing their inventory. UMC will continue to navigate adverse conditions in an increasingly competitive landscape and growing geopolitical tensions through a diversified manufacturing base and differentiation in specialty 12-inch technologies.”

Outlook for the first quarter of 2024

United Micro expects wafer shipments to increase 2% to 3% year over year. USD ASP will decrease by 5%. The gross profit margin will be approximately 30%. Capacity utilization will be between 60% and 60%. Capital expenditures are expected to amount to approximately $3.3 billion in 2024.

Monthly sales updates for 2024

On February 6, 2024, United Micro reported that January 2024 revenues decreased 2.9% year-over-year to $591.8 million. On March 6, 2024, the company reported that February 2024 sales increased 3.1% year over year to $542.25 million. On April 8, 2024, United Micro reported that March sales increased 2.7% year-over-year to $579.44 million.

Update on the Taiwan earthquake

On April 3, 2024, Taiwan experienced a magnitude 7.2 earthquake off the coast of Hualien, Taiwan. It had no material impact on United Micro’s operations. All staff were declared safe and sound and automatic safety measures were activated at the Hsinchu and Fab 12A factories in Tainan as some wafers in the production line were affected. All systems were resumed without any financial impact on the company’s business.

United Microelectronics analyst ratings and price targets I’m on MarketBeat. UMC stock trades for forward earnings of 12.1X.

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