TSMC just said this: WE WERE WRONG!
Taiwan Semiconductor Manufacturing Company (TSMC) $Taiwan Semiconductor (TSM.US)$ just released its 2023 Q1 earnings report. By the looks of it, they missed revenue by 1.9%, Act. 508 trillion TWD V.S. Est. 518 Trillion TWD and beat EPS by 6.8%, 7.98 TWD/share V.S. Est. 7.48 TWD/share. However, the most important message was buried in their earnings call: They were wrong about forecasting inventory corrections would bottom in Q2.
TSMC is the bellwether semiconductor industry. They are the chip providers to many tech giants such as Apple and Nvida $NVIDIA (NVDA.US)$ . They are also the biggest customer of world's leading manufacturer of chip-making equipment, ASML. In other words, if TSMC is not doing well, it means Apple and Nvida are not selling as many of their products and ASML's $ASML Holding (ASML.US)$ order book will shrink. With the understanding of the importance of TSMC, let's dive into their earnings call and find out the current state of semiconductor industry.
The management started the call by saying they were wrong about forecasting Q2 will be the bottom of this inventory cycle. Due to worsening economy and weaker China's re-opening, they now expect the inventory adjustment cycle will last until Q3 and start recovering in Q4. As a result, they also lower their revenue guidance for the negative high single digit to -10% YoY. But they reiterate that Q2 will be the worst quarter for the company and revenue in second half will increase by 25% compared to the first half.
If we look at the demand down by the end use market, PC and Smartphone continue to show weakness. Auto demand remains robust but some signals of slowing down start to surface. AI trend is real as observed from the demand, so it helps speeding up inventory cycle.
From investment perspective, they reiterate 32-36B USD CAPEX spending for 2023 which support ASML's future order book. On the factory in Arizona, they have been hiring and the plant is expected to start production in 2024. However, for the same chip produced in Arizona fab, the cost will likely be a lot higher than the exact chip produced in Taiwan due to higher factory building, labor, and material cost. At the end of the day, someone is going to bite on the cost. Let's just hope that someone is not the end consumers.
In summary, TSMC's earnings report never disappoints investors. But as semiconductor investors, we should not be overly optimistic about the impact of macro on chip demand evidenced by TSMC's misjudgment from last quarter. On the other hand, long term investment thesis does not change due to secular chip demand from various emerging technologies such as EV, Factory automation, AI, and Green energy transition.
Disclosure: The author does not own any stocks mentioned in the writing and this is not financial advice.
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