Chipmaker warns of slowing industry growth

Taiwan Semiconductor Manufacturing Company (NYSE:TSM), a veritable behemoth among artificial intelligence (AI)-enabled hardware manufacturers, just filed its 2023 Form 20-F annual report. This is a major event for the global chip manufacturer industry. It includes not only the company’s results, but also Taiwan Semiconductor’s message to the market as a whole.

Because Taiwan Semiconductor is the largest contract chip manufacturer on the planet, its foundries supply essential AI-compatible chips to technology companies on multiple continents. So even if you don’t invest in TSM stock directly, Taiwan Semiconductor’s recent filing will almost certainly have a ripple effect on your portfolio.

So with Taiwan Semiconductor in the red today, consider the big-picture implications as well as company-specific results. And remember, stock markets that rise on the hype about AI hardware can quickly fall on disappointment with it.

Taiwan Semiconductor continues its winning streak.

TSM stock is down today, but you can’t blame the company’s financial results for that. Taiwan Semiconductor has an outstanding track record of quarterly EPS beats, and the company continued this winning streak with Q1 2024 results that exceeded expectations.

Keep in mind that these are difficult times for Taiwan-based companies, as the region recently experienced a massive 7.2 magnitude earthquake. This did not impact Taiwan Semiconductor’s first quarter results, but some investors may be concerned about its impact this quarter.

But in a near-miraculous recovery, Taiwan Semiconductor achieved recovery of more than 70% of its manufacturing tools in 10 hours and full recovery just three days after the earthquake. This will hopefully minimize the operational impact on Taiwan Semiconductor’s second quarter sales.

But it wasn’t all bad news for Taiwan Semiconductor during the quarter. In early April, the U.S. Department of Commerce announced $6.6 billion in subsidies to Taiwan Semiconductor’s U.S.-based plant to promote advanced semiconductor production in the city of Phoenix, Arizona. This could prove to be a win-win for both Taiwan Semiconductor and the United States as the Taiwanese government works to encourage domestic AI chip production.

But what about Taiwan Semiconductor’s performance in the first quarter of 2024? As a result, there is a lot of positivity around. Taiwan Semiconductor generated revenue of $18.87 billion, up 13% from the previous year. For the current quarter, Taiwan Semiconductor expects to report revenue of $19.6 billion to $20.4 billion. This is a very optimistic guidance considering the magnitude of the earthquake that occurred earlier this month.

But the earthquake wasn’t the only headwind. Taiwan Semiconductor’s first-quarter results were “impacted by smartphone seasonality, partially offset by ongoing high-performance computing (HPC)-related demand,” Wendell Huang, the company’s chief financial officer, explained in a statement.

Now turning to the bottom line, Taiwan Semiconductor reported net profit for the first quarter of 2024 of 225.49 billion New Taiwan Dollars (NT), or equivalent to $6.97 billion in US dollars. This is an 8.9% increase over the previous year and is also ahead of the curve. Analysts’ consensus estimate is NT$215.4 billion. To put things in perspective, Taiwan Semiconductor posted earnings of $1.34 per share, compared to Wall Street forecasts of $1.30 per share.

Market-wide warning from Taiwanese semiconductors

Overall, Huang seemed fairly confident about Taiwan Semiconductor’s growth prospects this quarter, even as he acknowledged the company’s challenges.

“As we move into the second quarter of 2024, we expect strong demand for our industry-leading 3-nanometer and 5-nanometer technologies to support our business, partially offset by continued smartphone seasonality,” Huang said. Yes.

Once again, referring to the company’s current quarter revenue guidance, we can be confident that Taiwan Semiconductor can demonstrate resilience. However, this does not necessarily mean that the global AI hardware industry as a whole will grow as quickly as previously expected. After all, the world’s chip manufacturing industry is still trying to recover from last year’s chip glut.

If you’re wondering why TSM stock price is in the red today, it’s probably because of Taiwan Semiconductor’s indirect warning about the global AI chip market. In particular, Taiwan Semiconductor revised its growth forecast for the entire chip market (excluding memory chips) in 2024 from ‘more than 10%’ to the current 10%.

Actually, it’s not a very pessimistic outlook, but the market has simply decided to see the glass as half empty today. Clearly, 10% year-on-year growth is no longer enough. This is especially true as the AI ​​chip hype has picked up steam over the past year.

Perhaps this is a sign that the market is expecting too much and has raised AI hardware inventory too high and too fast. Still, considering Taiwan Semiconductor’s impressive quarterly results, holding on to some TSM stock is probably a fairly safe bet if you’re willing to ride out the current quarter’s headwinds, whether expected or not.