Chip giant TSMC offers reassurance—and a warning
Summary
The chip industry is recovering more slowly than expected from the inventory glut of 2023 but the semiconductor investments required for the rapid growth of artificial intelligence are on track.
The chip industry is recovering more slowly than expected from the inventory glut of 2023.
That was the bad news from Taiwan Semiconductor Manufacturing Co, the world’s largest contract chip maker, which reported first-quarter results Thursday. On a call with analysts, the company cut its forecast for overall market growth this year, excluding memory chips, to 10%, down from “more than 10%" three months ago. Its U.S.-listed shares fell roughly 2% in premarket trading.
The standout reason for the downgrade was automotive chips: TSMC previously expected demand from the sector to increase this year, but now it expects a contraction instead. The company didn’t give an explanation, but the most likely one is slowing growth in chip-intensive electric vehicles.
The good news for TSMC investors is that the company, despite often being seen as a chip-industry bellwether, isn’t the same thing as the market. Importantly, the company maintained its forecast that its own revenue will grow by more than 20% this year in dollar terms.
Partly this is because it is a pure foundry operation—TSMC only makes chips designed by others—and the foundry business has more room to recover, having suffered more in the recent slump. At the same time, the company’s lead in manufacturing the most advanced chips also makes it a disproportionate beneficiary of the industry’s biggest growth driver: artificial intelligence.
Nvidia uses TSMC and its Korean competitor Samsung Electronics to manufacture the expensive AI chips that the likes of Microsoft and Alphabet are buying in huge quantities to upgrade their data centers. “AI-related data-center demand is very, very strong," said chief executive and chairman-in-waiting C.C. Wei, even as he cautioned about the sluggish recovery in chip purchases for smartphones, personal computers, traditional data-center servers, cars and other consumer products.
That message will come as a relief to the industry a day after Dutch lithography giant ASML, which makes the machines needed to manufacture the most advanced chips, reported weak first-quarter orders. U.S. chip stocks fell Wednesday, with Nvidia down roughly 4%.
ASML implied that TSMC itself was partly responsible for the miss and would need to increase its orders. “There’s a few usual suspects absent in the order intake…Foundry indeed does come to mind in this discussion," the Dutch company’s chief financial officer Roger Dassen told analysts on Wednesday.
He has a point: At $5.6 billion, TSMC’s capital expenditures in the first quarter were the second-lowest since 2020. Yet the foundry maintained its guidance for capex of between $28 billion and $32 billion for the year. That implies that it will need to spend much more for the rest of the year—$8.1 billion a quarter on average at the midpoint.
While the broader chip-market recovery will be slow, the foundations of the AI revolution are on track.
Write to Stephen Wilmot at stephen.wilmot@wsj.com
