Taiwan Semiconductor Manufacturing (TSM 1.26%) lowered its full-year outlook for the semiconductor industry on Thursday amid persistent macroeconomic and geopolitical uncertainty. The foundry market leader now expects a "more mild and gradual" recovery this year.
While overall demand will be somewhat mixed, TSMC expects to churn out far more AI accelerators this year than it did in 2023. The company sees revenue from AI accelerators more than doubling in 2024 to reach a low-teens percentage of overall sales. Over the next five years, TSMC expects AI accelerator revenue to grow at a 50% annual rate.
NYSE: TSM
Key Data Points
Moving mountains to boost capacity
TSMC has had some issues with its 3-nanometer process node. Apple uses the top-tier process for its custom chips, but AI accelerators have been relegated to older 5nm technology. Nvidia's recently announced Blackwell data center GPUs were widely rumored to be using TSMC's 3nm node, but they instead will utilize a modified version of the same process used by their predecessors.
TSMC is taking some extraordinary steps to boost its 3nm capacity for AI chips. The company is planning to convert some of its 5nm tools to support the 3nm process, effectively reducing its 5nm capacity in exchange for additional 3nm capacity.
The downside of this move will be a hit to profitability. TSMC expects its gross margin to be reduced by 1 to 2 percentage points in the second half of this year. The company hasn't changed its long-term gross margin forecast, but it will be working to find ways to cut costs to offset the gross margin impact.
Unfortunately, there's a limit to how much extra capacity for newer nodes TSMC can create using this method. When asked by an analyst during the earnings call whether it would be possible to bolster 5nm capacity by shifting some resources from the currently underutilized 7nm node, TSMC CEO C.C. Wei explained that the physical proximity of the 5nm and 3nm equipment made the move possible and that a similar shift would not be possible for other nodes.
TSMC expects its upcoming 2nm node to go more smoothly. Wei sees the 2nm node having more tape-outs in its first two years than either the 3nm or 5nm nodes, largely due to AI-related demand. Volume production on the 2nm node will begin sometime in 2025.
The Intel wild card
While demand for AI chips is soaring, TSMC is set to be locked in a battle with Intel (INTC 3.03%) starting next year for semiconductor foundry supremacy. Intel is aiming to grow into the world's second-largest foundry by 2030, growth that will be fueled by new process nodes that could overtake TSMC technologically.
TSMC is optimistic that its 2nm process will reign supreme, but Intel is equally optimistic that its Intel 18A process will be the top dog when it enters production early next year. Intel has one critical advantage: Intel 18A will use backside power delivery technology, which can meaningfully boost performance and efficiency. TSMC won't be implementing backside power delivery until its second-generation 2nm nodes.
AI chip demand will help fuel TSMC's growth going forward, but the company won't have the market to itself. Capacity coming on line from Intel and Samsung that rivals TSMC's best process nodes could put pressure on its market share and profitability.
