As businesses' rapid digitalization creates robust demand for tech products and solutions, the shares of many large-cap tech companies are soaring to new price highs. Continued demand for improved networking, data storage, and IoT devices in the coming 5G era, along with the adoption of hybrid work structures, have been driving the performance of major tech companies lately.
Investor optimism over the tech industry’s growth prospects is evident in the iShares U.S. Technology ETF’s (IYW) 9% returns over the past three months compared to the SPDR S&P 500 ETF Trust’s (SPY) 7.1% gains. However, production disruptions caused primarily by a global semiconductor chip shortage have reduced the sales and earnings of most companies in the industry. Against this backdrop, the momentum of many large-cap tech stocks looks unsustainable, making them susceptible to a pullback in the near term.
Taiwan Semiconductor Manufacturing Company Limited (TSM), Palantir Technologies Inc. (PLTR), and Fortinet, Inc. (FTNT) have hit price levels that are not justified by their growth potential. So, Wall Street analysts expect these stocks to retreat in the near term.
Taiwan Semiconductor Manufacturing Company Limited (TSM)
With a market capitalization of $619.48 billion, TSM is a Taiwan-based company that manufactures, sells and packages integrated circuits and other semiconductor devices, and provides computer-aided design services. The company serves customers in computer, communications, consumer, and industrial and standard segments worldwide.
On June 2, 2021, TSM and NXP Semiconductors N.V. (NXPI), a world leader in automotive processing and semiconductor manufacturing, announced the mass production of NXPI’s S32G2 vehicle network processor and S32R294 radar processor under TSM’s advanced 16 nanometer FinFET process technology. Implementation of TSM’s technology will help NXPI’s automotive processors improve their performance in rigorous automotive processing, thus delivering safe next-generation computing power in its autonomous vehicles.
For the first quarter ended March 31, TSM's gross profit decreased 2.8% sequentially to $6.77 billion. The company’s income from operations declined 4.2% sequentially to $5.37 billion. Its net income came in at $4.98 billion, which represents a 2.2% decline from the prior quarter. TSM’s earnings per ADR decreased 2.1% sequentially to $0.96. As of March 31, 2021, TSM had $23.70 billion in cash and cash equivalents.
However, the company’s valuation ratios are higher than its peers. In terms of its forward EV/Sales, TSM's 9.80x is 124.8% higher than the 4.36x industry average. In terms of forward Price/Sales, the stock is currently trading higher than the industry average (10.03x versus 4.09x).
TSM has gained 113.2% over the past year and closed yesterday’s trading session at $119.45. Wall Street analysts expect the stock to hit $85.78 in the near term, indicating a potential 28.2% decline.
TSM’s poor prospects are also apparent in its POWR Ratings. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has a D grade for Value and Growth. In addition to the POWR Ratings grades we’ve just highlighted, one can see TSM's ratings for Momentum, Stability, Sentiment and Quality here.
The stock is ranked #52 of 98 stocks in the B-rated Semiconductor & Wireless Chip industry.
Click here to checkout our Semiconductor Industry Report for 2021
Palantir Technologies Inc. (PLTR)
PLTR delivers a suite of software applications for integrating, visualizing, and analyzing information, and serves commercial businesses and governments worldwide. The company also offers automotive, financial compliance, legal intelligence, and mergers and acquisitions solutions. PLTR has a $45.81 billion market capitalization.
PLTR was awarded a $7.4 million one-year contract renewal by the U.S. Centers for Disease Control and Prevention (CDC) on June 8, 2021, to continue providing an outbreak response and disease surveillance solution for the Data Collation and Integration for Public Health Event Response Program. PLTR’s foundry-based platform will facilitate the collection and integration of epidemiological, surveillance, and laboratory data and provide tools for multiple organizations to investigate and act. PLTR’s cost of revenue for the first quarter, ended March 31, 2021, increased 15.3% year-over-year to $74.11 million. As of March 31, 2021, the company had $2.45 billion in cash, cash equivalents and restricted cash.
Analysts expect the company’s EPS to decline 50.2% year-over-year in the next quarter (ending September 30, 2021) to $0.03. In terms of forward EV/Sales, PLTR is currently trading at 30.44x, which is 598.4% higher than the 4.36x industry average. And in terms of its forward Price/Sales, the stock is currently trading at 30.97x, 657.4% higher than the 4.09x industry average.
The stock has gained 3.7% year-to-date but lost 8.9% over the past three months. It closed yesterday’s trading session at $24.41. Wall Street analysts expect the stock to hit $22 in the near term, which indicates a 9.9% potential downside.
It’s no surprise that PLTR has an overall D rating, which equates to Sell in our POWR Ratings system.
The stock also has an F grade for Value, and a D grade for Stability and Sentiment. Click here to see the additional POWR Ratings for PLTR's Growth, Quality and Momentum.
PLTR is ranked #11 of 13 stocks in the F-rated Software - SAAS industry.
Click here to check out our Software Industry Report for 2021
Fortinet, Inc. (FTNT)
With a $37.93 billion market cap, FTNT provides broad, integrated, and automated cybersecurity solutions and offers security subscription, technical support, professional, and training services worldwide. The company sells its security solutions to channel partners and directly to various customers in telecommunications, technology, government, financial services, education, retail, manufacturing, and healthcare industries.
This month, four new service providers worldwide, namely Commandlink, DNA, Syringa Networks and Telecom Italia, have selected FTNT’s Fortinet Secure SD-WAN. FTNT’s security-driven networking approach and value-added services helps service providers significantly improve user experience and simplify operations, thus achieving growth in business and revenue margins. FTNT hopes these partnerships will expand its footprint around the world.
For the first quarter ended March 31, FTNT’s revenue decreased 5% sequentially to $710.30 million. The company’s gross profit declined 4.7% sequentially to $553.70 million. Its operating income is reported to be $121.60 million, down 28.2% from the prior quarter. FTNT’s net income came in at $107.20 million, which represents a 26.9% decline from the prior quarter. Its EPS decreased 28.1% sequentially to $0.64. The company had $1.86 billion in cash and cash equivalents as of March 31, 2021.
FTNT’s valuation ratios are much higher than its peers. In terms of non-GAAP forward P/E, FTNT’s 61.58x is 132.9% higher than the 26.44x industry average. Its 12.07x forward Price/Sales is 195.2% higher than the 4.09x industry average.
FTNT has gained 94.6% over the past nine months and ended yesterday’s trading session at $230.06. However, the stock is expected to hit $221.67 in the near-term, which represents a potential 3.7% decline.
FTNT’s POWR Ratings are consistent with this bleak outlook. The stock has a D grade for Value. We have also graded FTNT for Stability, Sentiment, Growth, Quality and Momentum. Click here to access all FTNT ratings.
FTNT is ranked #8 of 24 stocks in the D-rated Software - Security industry.
Click here to check out our Software Industry Report for 2021
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TSM shares were trading at $117.75 per share on Wednesday afternoon, down $1.70 (-1.42%). Year-to-date, TSM has gained 8.31%, versus a 12.84% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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