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5G and Data Center Demand Has Taiwan Semiconductor Riding High

By Nicholas Rossolillo – Jul 16, 2020 at 4:47PM

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The industry’s largest manufacturer thinks the remainder of 2020 will be A-OK.

While the world at large tries to put itself back together from the fallout caused by COVID-19, the semiconductor industry is doing more than just fine. Several reports from network infrastructure giant Broadcom (AVGO -0.70%) and memory chip maker Micron Technology (MU -0.88%) provided an early indication that several years' worth of technology development is getting compressed into 2020 due to the pandemic. The world's largest chip manufacturing outfit, Taiwan Semiconductor (TSM -0.69%), is perhaps the best proof yet of this.

Massive demand for next-gen communications

In its just-released fiscal 2020 second-quarter earnings report, Taiwan Semiconductor said all of its segments contracted compared to the first quarter of the year -- except for the high-performance computing segment (HPC), which grew 12% from Q1 and totaled a third of revenue. The surging HPC unit, which includes both 5G and data center hardware manufacturing, more than offset contractions in smartphone chips (47% of revenue), Internet of Things (8%), and automotive (4%).

Someone is a business suit holding a tablet. A brain illustrated with electrical connections hovers above the screen.

Image source: Getty Images.

On a sequential basis, HPC merely offset losses elsewhere and revenue ended up coming in flat. However, compared to a year ago, 5G mobile network expansion and data center construction to support cloud computing services is creating a dramatic upside for TSM. Revenue in Q2 was 34% higher from a year ago, and the slant toward more advanced hardware led to an even bigger increase in profit margins. In total, the first half of 2020 has been a very good one for the global chip foundry empire. 

Metric

First Half 2020

First Half 2019

Change

Revenue

$20.7 billion

$15.3 billion

35%

Operating profit margin

41.8%

30.6%

11.2 pp

Net income

$7.93 billion

$4.27 billion

86%

Revenue and net income calculated using New Taiwan dollar to U.S. dollar exchange rates from June 30, 2020. Pp = percentage point. Data source: Taiwan Semiconductor. 

A great tech dividend

The outlook for the rest of 2020 remains solid too. Taiwan Semiconductor says 5G continues to ramp up, and after supplying a bunch of new network equipment to aid in the rollout of the mobile networks themselves, the need for chips powering phones that can connect to 5G will start to contribute to growth. As smartphone wares remain nearly half of revenue, that looks like good news that growth may continue into 2021 (since smartphone sales are expected to end 2020 down double-digit percentages).

But that's a discussion for another day. For 2020, guidance for Q3 revenue of $11.2 billion to $11.5 billion represents a 21% increase from 2019 at the midpoint. The operating profit margin is expected to be no less than 39%, which should lead to another massive uptick in net income.

Granted, shares are up 79% since the start of 2019 -- and 14% so far in 2020 -- on rising optimism surrounding 5G, the cloud, and other high-end semiconductor needs of Taiwan Semiconductor's customers. Nevertheless, there could be plenty left in the tank. The 5G rollout is going to take years, and eventually, the segment laggards like smartphones and autos will rebound as the effects of global lockdowns slowly begin to ebb. Along the way, the dividend currently yields an attractive 2.5% a year and is handily covered by this tech hardware giant's ample cash generation. 

Thus, for investors looking for a great long-term balance between growth and investment income, Taiwan Semiconductor remains a great bet. A new upgrade cycle driven by 5G and data center chips is just getting started, and this manufacturer is in prime position to benefit.

Nicholas Rossolillo and his clients own shares of Broadcom Ltd and Micron Technology. The Motley Fool owns shares of and recommends Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Taiwan Semiconductor Manufacturing Stock Quote
Taiwan Semiconductor Manufacturing
TSM
$81.40 (-0.69%) $0.57
Broadcom Ltd Stock Quote
Broadcom Ltd
AVGO
$529.91 (-0.70%) $-3.73
Micron Technology Stock Quote
Micron Technology
MU
$58.41 (-0.88%) $0.52

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