TSMC Q3 2024 Outlook: Expect Healthy 3Q24 Performance | Moomoo Research

TSMC (TSM) is set to announce its latest Q3 earnings this Thursday (October 17) Beijing time.According to Bloomberg consensus estimates, TSMC's Q3 revenue is expected to reach NT$750.53 billion, a year-on-year increase of 37.27%; net profit is projected at NT$299.3 billion, a year-on-year increase of 42%.

Since the last quarterly report, TSMC has moved past a period of fluctuations and recently hit a new all-time high in its stock price, increasing by over 18% since September 6. With monthly sales already disclosed, this earnings report will focus on TSMC's gross margin and its outlook and guidance for Q4.

Figure: TSMC Stock Performance

Data Source: Moomoo, compiled by Futu Securities

In terms of revenue, TSMC's total sales for Q3 (July-September) are projected to be NT$759.69 billion, or US$23.6 billion. July revenue was NT$256.95 billion, a year-on-year increase of 38.9%; August revenue was NT$250.87 billion, a year-on-year increase of 36.8%; and September revenue reached NT$251.87 billion, a year-on-year increase of 39%.

The Q3 sales figures not only exceed the current market consensus estimate of NT$750 billion but also surpass TSMC's previous guidance: TSMC had provided revenue guidance of US$22.4 billion to US$23.2 billion in July, with a midpoint of US$22.8 billion, and the actual results exceeded the upper limit of the guidance, being 4% above the expected midpoint.

Figure: TSMC September Sales Performance

Data Source: Company Announcement, compiled by Futu Securities

The sales report for Q3 indicates that TSMC's order situation remains robust.The growth momentum for TSMC in Q3 is still built on high-performance computing, especially in AI chips.

Apple's iPhone 16 launch event did not trigger a recent upward cycle inAIsmartphones. Given that Apple is phasing in its main iPhone products with Apple Intelligence, buyers remain cautious. However, the weakness in global smartphone sales is gradually diminishing. According to Canalys, global smartphone shipments grew by 5% year-on-year in Q3, marking four consecutive quarters of growth, and smartphone demand in Q3 is expected to perform better than in Q2.

Figure: Smartphone Shipment Statistics

Data Source: Canalys, compiled by Futu Securities

By Q2 2024, the revenue share of high-performance computing (HPC) has risen to 52%. This is reflected in Micron Technology's earnings report released at the end of September, which noted a surge in demand for HMB3E memory products in the previous quarter (ending August 29). The strong demand for HMB3E indicates robust demand for GPUs aimed at data centers, from which TSMC, as a foundry, directly benefits.

With market expectations that Blackwell chips will begin mass shipments, the clarity of TSMC's forward guidance is expected to improve.Earlier this month, Jensen Huang stated that Blackwell chips have entered full production, with "insane" demand for Blackwell. Reports indicate that products based on Blackwell chips are sold out for the next 12 months.

Figure: Q2 2024 Revenue Sources by Platform

Data Source: Company Announcement, compiled by Futu Securities

In terms of profits, TSMC has guided its gross margin to be between 53.5% and 55.5% (compared to 53.2% in the previous quarter), with operating margin projected between 42.5% and 44.5% (42.5% in Q2).

We believe that the increase in the revenue share of processes below 7nm will continue to drive up TSMC's average selling price per wafer.Strong demand for 3nm orders in the second half of 2024 is expected to push utilization rates close to full capacity, continuing into 2025.

Moreover, due to capacity constraints, TrendForce reports that TSMC plans to raise the prices of its 3nm chips by over 5%, while advanced packaging prices are expected to increase by 10% to 20% next year. Given that 3nm accounted for 15% of its revenue in Q2 of fiscal year 2024, the continued mass production of 3nm will positively impact the company's gross margin by driving up the average selling price of its products.

Figure: Q2 2024 Revenue by Technology

Data Source: Company Announcement, compiled by Futu Securities

On the other hand, TSMC's investment in new capacity (especially for AI chips), the transition from N5 to N3, and cost inflation (such as electricity costs in Taiwan) may also lead to additional costs, increasing the company's manufacturing expenses and partially offsetting the improvement in profit margins.

However, overall, TSMC's gross margin has already emerged from a phase of low performance. It is expected that the growth rate of administrative expenses will be lower than the growth of revenue and gross profit, which may lead to a corresponding increase in profit margins due to TSMC's revenue and output growth.

We believe that for Q3 2024 earnings, both revenue and profit are likely to perform positively. Demand in Q4 is expected to remain strong, and the challenges faced by Intel and Samsung have enhanced TSMC's position as the preferred AI foundry, allowing TSMC to likely maintain a significant market leadership position. The robust demand for AI and the marginal improvement in the smartphone business combined make TSMC's revenue outlook for Q4 still positive.

As of October 15, TSMC's stock price was $187, equivalent to 28 times and 22 times the consensus expectations for 2024/2025. Even though the stock price has recently increased, from the perspective of comparisons with other semiconductor companies listed in the US, we can see that TSMC's valuation remains relatively cheap.

Figure: Comparable Valuation of US-listed Semiconductor Companies

Data Source: Bloomberg, compiled by Futu Securities

However, considering the potential adverse effects of geopolitical risks, especially with the current U.S. elections underway, there is a certain discount on TSMC's valuation in the medium to long term. Investors should closely monitor the earnings report release and performance guidance.