Contract chip manufacturing giant Taiwan Semiconductor Manufacturing Company (NYSE:TSM) announced that it expects its revenue for the entirety of 2018 to grow by "about 10%" -- a downward revision from its previous forecast of between 10% and 15% revenue growth.
That forecast cut, TSMC co-CEO C.C. Wei says, is due to "smartphone weakness and the uncertainty in cryptocurrency mining demand."
Let's dive deeper into these potential issues.
Weaker smartphone market
Much of TSMC's revenue comes from manufacturing chips that go into smartphones. Last quarter, TSMC reported that a whopping 55% of its revenue came from sales of chips into the "communication" segment, which consists primarily of smartphone chip sales.
One of TSMC's biggest customers is Apple, so it wouldn't come as much of a surprise to learn that weakness in Apple's iPhone shipments is influencing TSMC's freshly cut revenue forecast.
Moreover, there have been several reports of smartphone shipment declines in large markets, such as China. Since many of TSMC's major smartphone chip customers rely on chip sales to China-based smartphone makers (e.g. MediaTek, Spreadtrum, and even Qualcomm), a slowdown in the China smartphone market means a slowdown in TSMC's business.
TSMC enjoys significant revenue from the sales of chips that are used for the production of cryptocurrencies by way of a process called "mining." TSMC doesn't design these chips, but key cryptocurrency chip makers like Bitmain rely on TSMC to manufacture their designs.
Generally speaking, the higher the prices of the cryptocurrencies that these specialized chips are designed to mine (Bitcoin is the main one, though there are reportedly specialized chips being developed to mine other coins, like Ethereum), the higher the demand for those chips. Bitcoin's price has fallen from a peak of roughly $19,000 per coin to around $8,500 per coin as of writing, so the profitability of mining those coins has come down substantially.
The prices of cryptocurrencies are quite volatile (it wasn't too long ago that Bitcoin was trading at around $6,000 per coin), so it's hard for the cryptocurrency mining chip companies and TSMC to estimate the demand that they'll see from their chips. If Bitcoin rockets to $20,000 within the next few months, then that would likely lead to a substantially different demand profile for specialized cryptocurrency mining chips than we'd see if Bitcoin plunged to $4,000.
"This kind of uncertainty is what we are talking about," Wei said on the company's most recent earnings call.
Moreover, Wei made it clear that TSMC isn't going to base its chip manufacturing capacity plans around cryptocurrency mining chips because of that uncertainty. He did, however, express TSMC's expectation that the same companies that develop cryptocurrency mining chips will "slowly move" to building chips dedicated to artificial intelligence processing -- a market that's growing and likely more sustainable over the long term.
Ultimately, TSMC's success over the past six years has been driven substantially by the smartphone boom, so it's unsurprising that TSMC's business would begin to suffer as the overall smartphone market suffers. Additionally, while cryptocurrency mining chip demand has generated significant revenue TSMC, the cryptocurrency markets, and therefore demand for chips used to produce cryptocurrencies, are naturally volatile, introducing an element of uncertainty into TSMC's results.
Despite these near-term disappointments, TSMC's execution has been solid as it continues to develop leadership technologies and is well positioned to capitalize on key growth markets like graphics processors and artificial intelligence chips.