Taiwan Semiconductor (TSM), the world’s largest contract chip maker, has dampened hopes of a chip recovery once again. TSM is a dominant player in the high-end chip market and has benefited from the excitement surrounding artificial intelligence (AI) applications. However, the company is currently facing challenges due to a significant drop in demand for electronic devices, which has had a negative impact on chip stocks, including Intel and Nvidia.
Hindered by Declining Demand
TSMC, known for manufacturing main processors for Apple iPhones, Qualcomm mobile chipsets, and processors made by Advanced Micro Devices (AMD), reported its first annual decline in quarterly profit in four years. This decline can be attributed to a reduction in purchases of smartphones and other devices. Chief Financial Officer Wendell Huang attributed this decline to the overall global economic conditions, which dampened end market demand and led to customers’ inventory adjustment.
AI Growth Not Strong Enough to Offset Weaker Demand
Despite being a key supplier to NVIDIA, the leading AI chip manufacturer, TSMC’s revenue from smartphones dropped by 9% compared to the previous quarter. Although AI chip growth is expected to benefit TSMC in the long run, the current market size is still too small to offset the weaker demand for smartphones and PCs.
The disappointing performance from TSMC led to a 3.3% decline in American depositary receipts of the company during premarket trading on Thursday. This came after a 38% rise in the company’s stock this year prior to Wednesday’s close. Additionally, TSMC’s chief U.S. rival, Intel, also experienced a 1.9% fall in their stock, while Nvidia fell by 1.1%.
Challenging Financial Results
TSMC’s second-quarter profit amounted to 181.80 billion Taiwanese dollars ($5.84 billion), a decline from 237.03 billion Taiwanese dollars reported during the same period in 2022. The company’s revenue also fell by 10% to 480.84 billion Taiwanese dollars, equivalent to $15.68 billion in U.S. dollars. This 14% drop in revenue, compared to the same period last year, highlights the challenging financial situation faced by TSMC.
Despite the current setback, TSMC remains poised to benefit from the eventual growth in AI chips. However, until the AI market expands further, the company will need to navigate the weaker demand for smartphones and PCs.
TSMC Expects Business Boost from 3-nanometer Technologies
In anticipation of the third quarter of 2023, TSMC is optimistic about the growth of its business driven by the strong performance of its 3-nanometer technologies. This positive outlook, however, is offset by customers’ ongoing inventory adjustments. The company has provided a revenue forecast for the third quarter, expecting it to fall between $16.7 billion and $17.5 billion, with an operating profit margin ranging from 38% to 40%.
TSMC also reiterated its capital expenditure forecast, indicating that it will be on the lower end of the previously projected range of $32 billion to $36 billion. The company plans to invest in its operations in Arizona. TSMC faces competition from Intel, as the latter aims to attract clients concerned about the future of Taiwan. China considers Taiwan a breakaway province that it intends to reunify with the mainland.
Analyst Matt Bryson from Wedbush responded to TSMC’s guidance, highlighting that the company anticipates a 10% decline in revenue for the full year, which is worse than expected. However, TSMC maintains an extended outlook of 15%-20% annual growth and expects gross margins to exceed 53%. “Despite the current soft outlook, which we believe is driven by macro factors rather than specific to TSMC, we remain positive on the stock,” Bryson wrote in a research note.
Wedbush reaffirmed its Outperform rating on TSMC and revised its target price for the company’s shares in Taiwan from 600 Taiwanese dollars to 650 Taiwanese dollars. On Thursday, TSMC’s Taiwan-listed shares closed down 0.3% at 579 Taiwanese dollars.