AI chip demand supports! TSMC's Q3 performance exceeds expectations, but net profit declines by 24.9% YoY | Earnings Report

The global chip industry has been in a prolonged downturn, compounded by the impact of a high base last year. However, TSMC's revenue and profit in the third quarter of 2023 exceeded market expectations, supported by AI demand.

On Thursday, October 19th, TSMC, the leading chip foundry, announced its financial report for the third quarter of 2023. The report showed that the company's revenue for the third quarter was approximately NT$546.73 billion, exceeding analysts' expectations of NT$537.34 billion. It decreased by 10.8% compared to the same period last year, but improved by 13.7% compared to the previous quarter.

TSMC's net profit for the third quarter was NT$211 billion, surpassing analysts' expectations of NT$216.61 billion. It decreased by 24.9% compared to the same period last year, but increased by 16.0% compared to the previous quarter. This marks the second consecutive quarter of profit decline for the company.

In the third quarter, TSMC's gross margin was 54.3%, operating profit margin was 41.7%, and net profit margin was 38.6%.

AI chip demand has driven TSMC's profit to exceed expectations in the third quarter.

In terms of shipment types, 5nm process accounted for 37% of the company's wafer sales in the third quarter of 2023, while 7nm process accounted for 16% of the total quarter's wafer sales. Overall, the revenue from advanced processes (including 7nm and more advanced processes) accounted for 59% of the total wafer sales, further increasing its share.

TSMC stated in its financial report:

Our business has been supported by the increasing demand for leading-edge 3nm and 5nm technologies. However, the continuous inventory adjustments by customers partially offset this support.

TSMC is a major supplier of NVIDIA's AI chips and has also benefited greatly from the AI frenzy sparked by ChatGPT. The company stated that even in the face of a sluggish global economy, businesses are eager to build their own AI tools, and TSMC's production and packaging capabilities for related chips will be in high demand until 2024.

The booming demand for AI chips has driven up TSMC's stock price, which has risen by 20% so far this year.

The inventory adjustment for chips is nearing its end, but TSMC may hit bottom later.

In the second quarter, TSMC's quarterly profit declined for the first time in four years due to the sharp drop in demand for consumer electronics such as smartphones and laptops after the pandemic. However, analysts believe that the inventory of smartphone and computer manufacturers is decreasing, and the demand for replenishment is expected to rebound. According to Canalys data, the global smartphone market only declined by 1% in the third quarter of 2023, indicating a slowdown in its decline rate. In the second quarter, the market plummeted by 11% compared to the same period last year. In a report released on Tuesday, Canalys pointed out that driven by regional recovery and demand for new product upgrades, the smartphone market achieved double-digit continuous growth in the third quarter, leading the sales peak season.

ASML, the main supplier of chip equipment for TSMC's expansion, recently released a tepid outlook for 2024, but expects a strong recovery in 2025. However, most analysts predict that the downturn cycle of the entire chip industry will bottom out earlier than TSMC.

TSMC released its fourth-quarter performance outlook in its earnings report, expecting revenue and gross margin to be similar to the third quarter, specifically:

Projected sales of $18.8 billion to $19.6 billion, gross margin of 51.5% to 53.5%, operating margin of 39.5% to 41.5%.

Analyst Mark Li from Bernstein stated in a research report that TSMC is expected to resume growth in 2024 and 2025, partly due to producing chips for Intel. Intel's latest personal computer chip, Meteor Lake, is scheduled to be launched at the end of this year, and Intel relies on TSMC to produce graphics processors, AI accelerators, and chipsets.

Aaron Jeng, an analyst at Nomura Securities, also agrees with this view, stating:

We are not far from the bottom of the semiconductor downturn cycle, and most chip developers' inventory adjustments should be completed by the end of this quarter.