Taiwan Semiconductor: Thriving In An Era Of High-Performance Computing And Rising Chip Demand

Seekingalpha2023-11-16

TSMC's key customer has shifted towards high-performance computing due to the rapid development of artificial intelligence and data processing needs.The mass production of TSMC's 3-nanometer ...

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Combined with the steady recovery of demand in the smartphone market, these two segments have led to growing demand for the company's advanced technologies, which we expect to continue.In addition, mass production of the industry-leading 3-nanometer technology will begin in Q4 2023, which will serve as a revenue driver for TSMC, offsetting the gradual decline in demand for 7-nanometer technology. The rating is BUY.TSMC revenue driven by cutting edge technologyWe have covered this stock before, and over the past year, TSMC has made significant progress in R&D, which now allows us to talk about mass production of 3nm chips and announce the start of sales of 2nm chips in Q2 2025.The company reported revenue of $17.3 bln (-15% y/y) in Q3 2023, up 10% q/q, despite the ongoing cycle of inventory adjustments, which we expect to be over by the end of the year. Q3 showed a steady recovery of demand in the smartphone and PC markets, with global PC shipments rising by 8% from 2Q 2023 to more than 65 mln units, while the smartphone market saw shipments going up by around 10% q/q to ~290 mln units.Revenue growth in the third quarter was mainly driven by robust development of industry-leading 3-nanometer technology, along with elevated demand for 5nm chips. As such, the share of revenue from cutting edge technologies, defined as chips from 7-nanometers and smaller, reached 59% (+6 pp q/q). High-end chips are used in two key segments, smartphones and high-performance computing (HPC), which together account for more than 80% of revenue. By 2023, a significant portion of TSMC's total chip demand comes from the HPC segment, driven in part by the rapid development of artificial intelligence and the increasing need to process massive amounts of data at high speeds, which is exactly what TSMC produces its advanced chips for.As for the other segments, we expect them to ramp up revenue proportionately, which will allow their relative contributions to the company's revenue structure to remain stable. For example, stable growth in the automotive sector will be driven by the rising number of electric cars that require up to 4 times more chips as conventional cars, while the growing popularity of AI and the potential for its adoption in smart homes will help the development of the Internet of things.Invest HeroesGiven the all-out race for the most advanced technology, the market was undoubtedly waiting for the start of sales of 3-nanometer technology. It has been reported that TSMC will start mass production of these chips in the fourth quarter of 2023. The company also maintains its forecast for the start of sales of 2nm chips in 2025. Considering the rising demand for the company's advanced technologies and the start of mass production of 3nm chips in 4Q 2023, we expect revenue from the sales of advanced technology to total $41.2 bln (+4% y/y) in 2023 and $51.7 bln (+26% y/y) in 2024. The growth will be partially offset by a gradual decline in demand for 7-nanometer technology, which will be replaced by more technologically advanced chips.Invest HeroesTo maintain its leadership in the industry and support 3-nanometer and 2-nanometer research, the company is aggressively ramping up its R&D investments, which reached a record $1.6 bln in 3Q 2023. As for investment in plants, even though TSMC has massive plans to build more factories in various countries, it has already invested a significant amount in expanding production in recent years, which is quite enough to power the chipmaker’s growth over the next few years. Therefore, the capex forecast has been lowered to $32 bln for 2023 and $30 bln for 2024.TSMC’s financial resultsWe have raised the revenue forecast from $66.1 bln (-13% y/y) to $67.5 bln (-11% y/y) for 2023, and from $76 bln (+15% y/y) to $81.6 bln (+21% y/y) for 2024, as we increased the forecast for the sales of advanced chips on the back of strong demand from the smartphone and HPC markets.Invest HeroesWe are raising the EBITDA forecast from $44.3 bln (-15% y/y) to $45.8 bln (-12% y/y) for 2023, and from $50.4 bln (+14% y/y) to $55.9 bln (+22% y/y) for 2024 as we raised the forecast for TSMC’s revenue and increased the gross margin estimate for 2023 from 53.9% to 55.5% on the back of accelerating sales of high-end chips and incremental phasing out of the less advanced processes. High-performance chips sell at a higher margin, so their expanding share in the revenue mix causes the company’s profitability to rise.Invest HeroesValuationWe are raising the target price of the shares from $107 to $132 due to:the increased EBITDA forecasts for 2023 and 2025;the increase of the target EV/EBITDA multiple from 11.6х to 12.7х following the higher forecast for the company’s growth;The shift of the FTM valuation period. The future financial results have become closer by one quarter.We are assigning a BUY rating to TSM stock.Invest HeroesRisksA potential recession in the U.S. could reduce demand for technology chips due to lower technology demand.The potential imminent end of the cycle of replacing data center chips with the latest versions, which will stabilize demand for TSMC technology at a lower level.China's progress in developing its own chips may allow it to stop buying some of TSMC's products.ConclusionThus, we expect the company's growth rate to accelerate due to higher demand for advanced technologies, especially now for 3nm and 5nm, and because high-performance chips are more marginal products, so their growth in the revenue mix will lead to higher profitability for the company. We expect the inventory adjustment cycle situation at customers to be resolved by the end of 2023, which will also help boost demand for the company's products.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2383383356"}