$Taiwan Semiconductor Manufacturing(TSM)$
TSMC share price has corrected a lot after a series of negative news such as Powell’s hawkish speech during Jackson Hole symposium and the US restriction on AI GPUs to China (affecting their major clients NVDA and AMD). As inventory destocking continues and demand weakness spreading to Data Center, the revenue and profit outlook for TSMC becomes bleaker. TSMC should see limited upside in the next three months until demand headwinds are clear.
More order cuts are coming in from smartphones (both MediaTek and Qualcomm) as well as some HPC customers (NVDA, AMD, etc.) which will likely result in a slower 2023. In particular, N7 is the primary area of concern due to weaker demand and migration to N5 for smartphone and HPC processors. Utilization rate for N7/N6 process nodes fab could be 90% or lower through 2023.
N5 capacity is still quite full, helped by strong demand from Apple and ramp-up of new products from AMD and Qualcomm. But the key factor is iPhone 14 demand. If iPhone 14 demand sees any weakness post launch, N5 utilization could drop below 100% and could see some slowdown in 2023. TSMC’s N3 node is seeing a slow start with only Apple as the key primary customer, but could see a very strong ramp-up in 2023 with its other key customers.
At the same time, small foundries are already cutting price by 5-10% while bigger foundries are facing more pressure to offer selective discounts to larger Fabless clients. There will be more price pressure in 4Q22 if iPhone or Data Center demand continue to see meaningful cuts. TSMC may eventually choose not to exercise the announced price hike for 2023 for large customers, but is unlikely to give price discounts, except maybe for N7/N6 node. Gross profit margin will likely suppress due to higher depreciation and cost inputs.
It’s not all gloomy and I am still confident in TSMC's ability to outperform peers in the next three to five years also has increased, helped by a strong traction within HPC customers. TSMC is by far the Foundry of Choice for HPC designs for advanced nodes and will likely to continue to see strong traction from hyperscalers (esp. Amazon, Google and Meta) in the next 2-3 years, while also seeing increasing automotive design activity for leading edge nodes. Even Intel’s Meteor Lake CPUs use three TSMC-made tiles. Moreover, the recent US restrictions on NVDA which prevent them from selling AI GPUs with performance at or higher than A100 to China should have limited impact on TSMC. It is highly unlikely for a blanket ban and commercial users of AI GPUs (such as Bytedance) could eventually secure licenses for shipments from NVDA.
I remain very bullish on TSMC’s long-term growth prospects, its technology leadership and accelerating market shares for N7 and below advanced nodes. That said, I do not expect much upside for the share price in the near term.
Comments