TSMC (NYSE: TSM) is the world’s largest and best Semiconductor Foundry.
Since the lows in November 2022, TSMC’s share price has nearly doubled from $60 to $103 at the close before its 2Q23 earnings was released.
This is quite remarkable considering less than a year ago, there was an expected slowdown and forecasted reduction in prices and demand.
We analyse how TSMC fared in 2Q23, reflect on its earlier guidance, its near term outlook and the status of its plans.
TSMC 2Q23: How did the semiconductor giant fare?
1) Financial highlights ????
For 2Q23, TSMC reported revenues of $15.68 billion, gross margins of 54.1% and operating margins of 42.0% resulting in earnings per share of $1.14.
In a nutshell:
- Revenue declined 6.2% QoQ and 13.7% YoY.
- Net income decreased 23.3%.
- Gross margin for the quarter was 54.1%, 2.2% lower QoQ and 5% lower YoY.
- Operating margin was 42.0%, 2.5% lower QoQ and 5.1% lower YoY.
The number of wafer pieces that TSMC shipped out was 9.6% lower QoQ and 23.2% lower YoY (at 2,916k pieces).
A revenue decline that is lower than the decline in number of pieces reflects the change in product mix as well as the pricing power that TSMC commands.
In 2Q23, Advanced technologies, defined as 7-nanometer (nm) and below, accounted for 53% of total wafer revenue. This comprised shipments of 5nm chips accounted for 30% of total wafer revenue; 7nm chips accounted for 23%.
The revenue contribution of advanced technology chips are 2% higher both on a QoQ and YoY basis.
2) Revenue analysis ????
Revenue declined 5.5% QoQ and 10% YoY due to the overall global economic conditions dampening end market demand. Customers have been managing their inventory levels to cater for existing conditions. The revenue decline was lower than expected as the AI boom compensated for a slump in smartphone demand.
From a segment perspective, HPC and Smartphone represented 44% and 33% of net revenue respectively, while IoT, Automotive, DCE, and Others each represented 8%, 8%, 3%, and 4%.
Sequentially, revenue from HPC, Smartphone, IoT, and Others decreased 5%, 9%, 11%, and 5% respectively from 1Q23, while Automotive and DCE increased 3% and 25% respectively.
From a geographic perspective, revenue from customers based in North America accounted for 66% of total net revenue, while revenue from China, Asia Pacific, EMEA (Europe, Middle East, and Africa) and Japan accounted for 12%, 8%, 7%, and 7% of total net revenue respectively.
3) Near term guidance ????
Compared to the 2Q23 guidance, TSMC came above the midpoint for net revenue and exceeded the upper range for both gross and operating margins.
TSMC beat its own expectations for 2Q23 and have forecasted 3Q sales of between $16.7 billion to $17.5 billion. This would be a quarter on quarter sequential increase and mark a reversal from two consecutive quarters of revenue decline.
Gross margin and operating margin for 3Q23 are estimated at 51.5–53.5% and 38–40% respectively. This is slightly lower then 2Q23 actuals due to the persistently weak near term environment.
4) Outlook & plans
TSMC has shared that it faces a skilled labor shortage in Arizona, where it is building a $40 billion chip fabrication factory comprising 2 facilities and is sending more workers from Taiwan to ramp up construction.
The first facility which is expected to make 4nm chips was scheduled to be operational by 2024 and is pushed out to 2025. A second facility which is expected to make 3nm chips was previously expected to be up and running by 2026. It is not clear yet if the second facility will be delayed.
TSMC said planned capital expenditure will be toward the lower end of the range of $32 billion to $36 billion, a decrease from 2022’s expenditure of $36.2 billion.
Should TSMC be on your watchlist?
The fabless business model was popular in the semiconductor industry because it allows manufacturers to invest profits in the research and development of new technologies while maintaining the high production volumes needed to maintain sales.
Because many companies were moving to a fabless setup, there was lesser competition for the foundries and as TSMC has technological superiority, it reached a point where TSMC became the singular most important company to the global economy.
TSMC’s advanced microchips are indispensable to iPhones, medical devices, missile launch platforms, and many other technologies, and they are largely unrivalled.
TSMC is an attractive investment for investors looking to have a position into Semiconductor stocks. The company started paying cash dividends from 2004 and have never reduced dividend per share.
Investors are also betting on TSMC becoming a heavyweight in the global race to develop next-generation AI. One of TSMC’s top customer in this segment is Nvidia whose chips are essential to ChatGPT, autonomous driving and a new generation of AI products.
After almost doubling from the bottom, it does not seem like the stock is cheap especially with the near term environment, however it is one stock where one probably has to acquire at a reasonable premium and position for the long term.
