Given the recent excellent results and commentary from Taiwan Semiconductor Manufacturing (TSM 1.26%), I thought I'd outline a few charts that help confirm the semiconductor industry. By extension, it's clear the electronics industry is firmly set for recovery in 2024. However, this isn't just about the semiconductor industry; chips are used in everything from computers to smartphones, automobiles, industrial equipment, and more. Good news from the semiconductor usually means good news for the economy down the line.
Taiwan Semiconductor leads the charge
The company's recent results were excellently received by the market, with management signaling an expectation for more than 20% growth in 2024, driven by artificial intelligence (AI)-led demand. While the capital spending forecast is superficially disappointing -- management is aiming for $28 billion to $32 billion compared to $30.4 billion in 2022 -- there are reasons for this. Simply put, Taiwan Semiconductor has ramped up spending to prepare for growth in recent years, so this year's forecast capital spending is still relatively high.
Of course, the semiconductor industry is highly cyclical and subject to shifts in the demand for its end market customers, so you shouldn't blindly invest in the sector based on a company's forecast.
The charts give support
That said, the billings data garnered from the Semiconductor Industry Association suggests a recovery is already in swing.
Image source: Getty Images.
Sometimes, tracking year-over-year billings or sales figures is difficult because they bounce around and don't always indicate a trend. Similarly, sequential statistics are always subject to seasonality, and it's hard to discern trends in highly volatile data.
Given these difficulties, it makes sense to find a benchmark and compare the current billings figures with that benchmark. In this case, it's the average sequential change in worldwide semiconductor billings going back to 2010 -- a date chosen because it came after the recovery from the great financial crisis.
Worldwide market billings
As the chart below demonstrates, there is a natural seasonality to semiconductor billings, with sequential improvement leading into customers' fourth-quarter production ramp-up from spring to fall, followed by a typical sequential slowdown at the start of the year.
Data source: Semiconductor Industry Association. Billings data is a three-month moving average. Chart by author.
Armed with the benchmark data above, it's time to compare the trends in the monthly data in 2021, 2022, and 2023 to see whether a pattern is forming. Notably, 2021 was a bumper year for the semiconductor industry, as lockdowns encouraged electronic equipment purchases. A glut of chips built up through 2022, as too much capacity was built up, leading to a challenging 2023.
As Taiwan Semiconductor CEO C. C. Wei said on the recent earnings call, "In 2023, weakening global macroeconomic conditions and high inflation and interest rate[s] exacerbated and prolonged the global semiconductor inventory adjustment cycle.
These trends are confirmed in the chart below, where strength in 2021 manifested itself in consistent sequential growth, leading to sequential declines from the spring of 2022 into the start of 2023.
Data source: Semiconductor Industry Association. Billings data is a three-month moving average. Chart by author.
Semiconductor billings are ahead of average performance now
Another more explicit way of showing the data is by looking at the delta of the sequential changes. In other words, measuring the difference between the 2021, 2022, and 2023 data and the benchmark. As such, any positive number indicates a better-than-average (meaning above the benchmark) sequential performance and a negative one indicates underperformance.
The chart shows a clear improvement in the back half of 2023, as sequential growth is coming in better than the 2010-2024 benchmark.
Data source: Semiconductor Industry Association. Chart by author.
What it means to investors
Be mindful that these numbers could quickly reverse in the coming months. However, it appears likely that a sustainable recovery is in place in the semiconductor industry. It will be somewhat contingent on lower interest rates to keep it going, and the potential for near-term disappointment shouldn't be underestimated.
Still, if you can ride out the volatility inherent in the sector, 2024 could be a great year to start investing in a cyclical economic recovery and semiconductor stocks like Taiwan Semiconductor.
