TSMC's (TSM 0.94%) stock dropped 5% on July 20 after the chipmaking giant posted its second-quarter results. Its revenue declined 14% year over year to $15.68 billion but beat analysts' estimates by $300 million. Its earnings per ADR also fell 26% to $1.14 -- its first profit decline in four years -- but still cleared the consensus forecast by six cents.
Those declines weren't surprising, since the global semiconductor market has been suffering a cyclical slowdown in a post-pandemic market, but a few gloomier details prevented the bulls from rushing back in. Let's review those red flags -- and see if they indicate that it's too late to invest in the world's largest and most advanced contract chipmaker.
Will TSMC's cyclical slowdown last?
TSMC manufactures the world's smallest and densest chips for fabless chipmakers like Apple, AMD, Nvidia, and Qualcomm. That list of top-tier clients makes TSMC a bellwether of the semiconductor market -- so its growth naturally cooled off as consumers bought fewer PCs and smartphones in a post-pandemic market. Macro headwinds also throttled the market's demand for other types of chips. As a result, TSMC's revenue fell sequentially over the past three quarters and dropped year over year over the past two quarters:
Metric |
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
---|---|---|---|---|---|
Revenue Growth (QOQ) |
3.4% |
11.4% |
(1.5%) |
(16.1%) |
(6.2%) |
Revenue Growth (YOY) |
36.6% |
35.9% |
26.7% |
(4.8%) |
(13.7%) |
In the second quarter of 2023, TSMC generated 44% of its revenues from high-performance computing (HPC) chips, 33% from smartphone chips, 8% from automotive chips, and another 8% from Internet of Things (IoT) chips. Its digital consumer electronics (DCE) chips accounted for 3% of its revenues, while the remaining 4% came from other kinds of chips.
Its automotive and DCE revenues rose sequentially, but those gains were offset by declines across all of its other verticals. During the second quarter conference call on July 20, CFO Wendell Huang attributed that slowdown to the "overall global economic conditions, which dampened the end market demand and led to customers' ongoing inventory adjustment."
For the third quarter, TSMC expects its revenue to grow between 6.5% and 11.6% sequentially (but still decline between 13.5% and 17.4% on a year-over-year basis) to a range of $16.7 and $17.5 billion. But for the full year, management expects revenue to decline 10% in USD terms -- compared to its prior outlook for a single-digit drop and analysts' expectations for a 7% decline.
TSMC also postponed the start of production at its new plant in Arizona from 2024 to 2025, partly due to a shortage of skilled workers. The company also said its 2023 capex would likely land at the low end of its prior forecast of $32 billion and $36 billion. Those decisions suggest the semiconductor slowdown will drag on through the end of the year.
Its margins are still being squeezed
As TSMC's revenue growth cools off, its margins are being squeezed by the lower-capacity utilization of its existing plants, the ramp-up of its production of next-gen N3 (3nm) chips, the expansion of its overseas fabs, and inflationary headwinds.
Metric |
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
---|---|---|---|---|---|
Gross Margin |
59.1% |
60.4% |
62.2% |
56.3% |
54.1% |
Operating Margin |
49.1% |
50.6% |
52% |
45.5% |
42% |
It expects that pressure to reduce its gross margin to a midpoint of 52.5% in the third quarter. Analysts expect its earnings per ADR to decline 22% for the full year -- but that forecast might be reduced to account for its revised revenue forecast.
Is it too late to buy TSMC's stock?
TSMC's near-term outlook may seem bleak, but it remains at least one to two chip generations ahead of its closest competitors -- Intel and Samsung -- in the "process race" to manufacture smaller and more power-efficient chips. TSMC's top customers won't leave anytime soon, and its growth could accelerate quickly once the semiconductor downturn finally ends and the macro environment improves.
Many investors seem to recognize that long-term value. That's why even after its post-earnings dip, TSMC's stock remains up more than 30% for the year. Yet it still looks cheap at nearly 20 times forward earnings -- which suggests it isn't too late to accumulate more shares for this semiconductor linchpin before a new growth cycle kicks off.