Contract chip manufacturing giant Taiwan Semiconductor Manufacturing Company (NYSE:TSM) "is expected to report flat sequential revenue growth for the second quarter with a possibility of a slight increase or decrease," DijiTimes said earlier this week, citing reports by both the Commercial Times in Taiwan and China's Economic Daily News.
That pessimism, the reports say, is due to a slowdown in dedicated chips designed specifically to perform the calculations required to produce cryptocurrencies such as bitcoin -- a process known as "mining."
Let's take a closer look at the details.
Bitmain cutting orders
By way of background, the largest producer of application specific integrated circuits, or ASICs, that are used to mine bitcoin -- the most popular cryptocurrency in circulation -- is a Chinese company called Bitmain.
As bitcoin's value has surged, demand for these bitcoin-mining ASICs has grown accordingly. However, with bitcoin prices down significantly from their peak (as of this writing, Bitcoin trades for $8,076 per token -- less than half of where it traded at its peak late last year), mining the tokens has become less lucrative, potentially reducing demand for Bitmain's ASICs.
Unsurprisingly, the Economic Daily News (via DigiTimes) reported that Bitmain has cut back its chip orders to Taiwan Semiconductor (TSMC). Additionally, TSMC is apparently "slowing down its materials orders, which may indicate orders thus far in 2018 are not as strong as they were a year ago," DigiTimes said.
How important is cryptocurrency to TSMC's revenue?
Although TSMC has refused to disclose the percentage of its revenue that comes from the sale of cryptocurrency-mining ASICs (it's also worth noting that TSMC manufactures NVIDIA (NASDAQ: NVDA) graphics processors, which are also used for cryptocurrency mining), demand for such chips is large enough that TSMC explicitly called out sales of wafers to cryptocurrency ASIC makers as a key growth driver last quarter.
According to Lora Ho, TSMC's chief financial officer, "Fourth-quarter revenue increased 10.1% sequentially to TWD 278 billion [$9.47 billion], mainly driven by major mobile product launches and continuing demand for cryptocurrency mining."
Additionally, analyst James Wang with ARK Invest claimed in a tweet that Bitmain is buying roughly 20,000 TSMC 16-nanometer wafers per month -- a figure that he observes is more than what graphics giant NVIDIA buys to support its large and rapidly growth graphics processor business.
TSMC -- the world's largest chip factory -- is all about crypto all of a sudden.— James Wang (@jwangARK) January 19, 2018
Bitmain is buying ~20k 16nm wafers a month. That's more than Nvidia. pic.twitter.com/ivZOqXvJXu
Considering that NVIDIA's cost of goods sold (which is dominated by silicon wafer purchases from TSMC) came out to $3.89 billion in its last fiscal year, it's highly likely that Bitmain makes up a non-trivial portion of TSMC's overall revenue.
So, sales of cryptocurrency-mining ASICs are important to TSMC's business, and the company's commentary on its most recent earnings call seemed to indicate that it expected such chips to continue to be important.
A slowdown in sales of such chips, then, could pose a real risk to TSMC's financial performance. So, if you're an investor in TSMC, I suggest paying close attention to what management has to say about demand trends regarding cryptocurrency-mining ASICs on its upcoming earnings conference call, scheduled for April 19.