What happened
Shares of contract semiconductor manufacturing giant Taiwan Semiconductor Manufacturing Company (TSM -2.29%) stock slid 5.1% through 12:50 p.m. ET Thursday, while Advanced Micro Devices (AMD -2.33%) lost 3.8% of its market capitalization and Intel (INTC -2.85%) -- relatively unscathed -- lost only 2.2%.
But it all started with TSMC.
NYSE: TSM
Key Data Points
So what
The world's biggest manufacturer of semiconductor chips reported its Q2 2023 financial results yesterday, and while earnings exceeded expectations ($1.14 per share where Wall Street predicted $1.08 per share), and sales came in stronger than expected as well ($15.7 billion instead of $15.5 billion), both numbers still represented sizable drops from the year-ago quarter.
Sales for the quarter fell 14% year over year (in dollar terms), while earnings fell even further -- down 23%.
CFO Wendell Huang blamed "dampened ... end market demand" and "customers' ongoing inventory adjustment" for the decline in sales. Worse, weak demand for chips hurt profit margins on chips as advantages from scale production eroded. Gross profit margin in the quarter shrank 5 full basis points year over year, to just 54.1%. Operating margin at this usually (and to be honest, still) uber-profitable chips shop lost more than 700 basis points, falling to 42%.
Now what
What really seems to be worrying TSMC investors this afternoon, however -- and worrying Intel and AMD shareholders as well -- is TSMC's forecast for the future.
Looking ahead to Q3, TSMC management forecasts sales of $16.7 billion to $17.5 billion. At the midpoint, that means $17.1 billion, whereas the midpoint of analyst estimates is $17.7 billion -- implying a big sales miss for TSMC could happen this current third quarter. Profit margins also appear to be on a confirmed downward trend, with management expecting gross margin to range from 51.5% to 53.5%. That entire range implies gross margin will fall below Q2 levels in Q3. Likewise with operating margin, which will range from 38% to 40% -- well below Q2's operating profit margin of 42%.
That's bad news for TSMC. By extension, it implies weak demand for chips that could impact sales and profit margins at Intel and AMD as well.
At the same time, Intel investors should perhaps be most concerned by TSMC's report. According to management, one of the few bright lights for TSMC in Q3 might be the "strong ramp" of the company's production of 3-nanometer chips for its customers. When you consider that Intel isn't expecting to begin ordering 3-nanometer chips (from TSMC, by the way) until late 2024, this implies that other chip companies that buy from TSMC (such as AMD of course, but also Qualcomm and Apple) could be more than a year ahead of Intel on this most advanced semiconductor technology.
While the continued weak demand for computer chips gives TSMC and AMD investors plenty to worry about already, I fear it's Intel investors who have the most reason to be concerned.
