TSMC as an Economic Indicator: The Worst Might Be Over

The predominant company in the vital semiconductor sector, TSMC, has published its third quarter results. Its business performance would give us a clue to the state of the global economy.

However, the results were lackluster. TSMC reported an 11% decrease in revenue and a 25% drop in profits (measured in $NT) compared to the previous year.

News reports have even called this situation TSMC's most significant profit decline in half a decade, and marking two consecutive quarters of profit decline, a trend not observed in four years.

Going beyond the headline figures, I aimed to delve further into the various segments to gain a more detailed understanding of which specific industries are underperforming.

TSMC's primary source of revenue is divided into two key segments. As of 3Q23, High Performance Computing (HPC) accounted for 42% of the revenue, encompassing GPU chips and high-end CPU chips used in servers. Notably, AMD and Nvidia are major customers within this category.

The second most substantial segment is smartphones, which generated 39% of the revenue. Prominent customers in this segment include Apple and Qualcomm.

The remaining sectors, namely IoT, automotive, and digital consumer electronics (DCE), constitute relatively minor revenue contributors, each accounting for less than 10% of the total.

To begin, it's worth noting that smartphone sales have experienced a continuous decline over the past nine quarters. In the third quarter of 2023, there was an 8% year-on-year decrease in global smartphone sales, as reported by Counterpoint Research.

This reduced demand had a direct impact on TSMC, leading to a 19% decline in its smartphone segment compared to the previous year.

Secondly, this year has predominantly revolved around the field of artificial intelligence (AI), with a surge in demand for GPUs as businesses raced to advance their AI technologies. Nevertheless, the enthusiasm appears to be waning, as TSMC's HPC segment experienced a 8% year-on-year decline.

It's important to note, however, that the HPC segment performed considerably better than other segments, which witnessed declines in the double digits. The demand for AI still played a crucial role in mitigating the overall dip in chip demand; otherwise, the performance could have been even worse.

In short, TSMC has witnessed revenue decline in all its business segments from a year ago!

However, there's room for optimism, as the figures also hint at the possibility of a recovery.

Quarter-over-quarter (QoQ) data shows signs of improvement, with the Smartphone segment surging by 33% and the HPC segment growing by 6%.

TSMC's revenue guidance for the fourth quarter of 2023 falls between US$18.8 billion and US$19.6 billion. While this is lower than the US$19.93 billion in the fourth quarter of 2022, it represents only a single-digit percentage decline of 2% to 6%. This marks an improvement from the 11% year-on-year revenue decline in the third quarter.

Furthermore, QoQ revenue growth is expected to continue, with the third quarter of 2023 recording a 10% higher revenue than the second quarter, and the fourth quarter of 2023 is projected to see further growth, with an increase of 9% to 13% over the third quarter.

Counterpoint Research has also noted a 2% QoQ increase in global smartphone sales in the third quarter of 2023.

In conclusion, although market demand continues to exhibit signs of weakness, it is evident that the semiconductor industry is on the path to recovery, indicating that the worst may be behind us.