Photo from TSMC.
The semiconductor sector is experiencing a slower-than-anticipated recovery following the surplus of inventory in 2023.
The latest update from Taiwan Semiconductor Manufacturing Co, the top contract chip manufacturer globally, came with disappointing news. During their report on first-quarter results on Thursday, the company revised down its projection for overall market growth this year, excluding memory chips, to 10% from the previous estimate of 'more than 10%' made three months ago. As a result, its shares listed in the U.S. dropped around 2% in premarket trading.
The primary factor behind the downgrade was automotive chips: TSMC had initially anticipated a rise in demand from this sector for the year, but now anticipates a decline instead. While the company didn't provide a specific reason, the most probable cause is the deceleration in growth of chip-heavy electric vehicles.
Positive tidings for TSMC investors include the distinction between the company and the broader market, despite TSMC often being viewed as a barometer for the chip industry. Crucially, the company upheld its projection of revenue growth exceeding 20% in dollar terms for the current year.
Part of the reason lies in its role as a pure foundry operation—TSMC solely produces chips designed by external entities—and the foundry sector possesses greater potential for recovery, having endured more pronounced setbacks in the recent downturn. Concurrently, TSMC's leadership in manufacturing cutting-edge chips positions it as a disproportionately advantaged recipient of the chip industry's foremost growth catalyst: artificial intelligence.
Nvidia relies on TSMC and its Korean rival, Samsung Electronics, to produce costly AI chips, which companies like Microsoft and Alphabet are procuring in large volumes to enhance their data centers. C.C. Wei, the CEO and chairman-in-waiting, highlighted the robust demand for AI-related data center products, while also noting the slower rebound in chip acquisitions for smartphones, PCs, conventional data center servers, automobiles, and other consumer goods.
This news will likely alleviate concerns in the industry, especially following the recent report from ASML, a leading Dutch lithography company responsible for manufacturing equipment essential for producing cutting-edge chips, which indicated a decline in first-quarter orders. On Wednesday, U.S. chip stocks experienced a drop, with Nvidia witnessing a decrease of approximately 4%.
ASML suggested that TSMC was partially accountable for the shortfall and indicated that it would need to boost its orders. The company's Chief Financial Officer, Roger Dassen, informed analysts on Wednesday, "There are a few expected participants missing from the order intake... Foundry does come to mind in this context."
He raises a valid observation: TSMC's capital expenditures in the first quarter, totaling $5.6 billion, were the second-lowest since 2020. However, the foundry upheld its guidance for capital expenditure, projecting between $28 billion and $32 billion for the year. This suggests that it will likely need to significantly increase spending for the remainder of the year, averaging $8.1 billion per quarter at the midpoint.
Although the overall recovery of the chip market is expected to be gradual, the fundamental elements of the AI revolution are progressing as planned.