TSMC Topped Estimates On The Back Of Insatiable AI Demand

Last Thursday, the world’s largest producer of advanced processors issued its first quarter results and they were even better than expected as AI demand continues to go strong. Taiwan Semiconductor Manufacturing Company Limited TSM, whose customers include the AI chip leader, NVIDIA Corporation NVDA as well as the tech titan Apple Inc AAPL, expects 2024 to be another year of healthy growth on the back of its technology leadership and broad customer base that also includes Advanced Micro Devices Inc AMD and Qualcomm Incorporated QCOM.

First Quarter Highlights

For the quarter ended on March 31st, TSMC reported net revenue grew 16.5% YoY to NT$592.64 billion. Net income rose 8.9% YoY to NT$225.49 billion.

The net profit margin continues to be one of the highest in the company’s history at 40%, while an industry average is about 14%, reflecting TSMC’s competitiveness.

Nvidia Set To Become The TSMC Of AI

Earlier in March, Nvidia clearly stated its aim to become the TSMC for AI as it continues its expansion beyond hardware, entering into software services. During its annual conference, GTC 2024, Nvidia CEO Jensen Huangunveiled new tools. In terms of AI development, Nvidia aims to do for the world exactly that what TSMC does for the AI chip leader by turning its design and concept into physical chips. Therefore, TSMC builds the chips Nvidia, Apple and others need and Nvidia wants to become the AI maker, turning concepts of its clients into a model they get to bring with them.

Second Quarter Guidance

For the current quarter, TSMC is supported by strong demand for industry-leading 3-nanometer and 5-nanometer technologies, but this strength is partially offset by a continued smartphone seasonality. TSMC guided for second-quarter revenue in the range between $19.6 billion and $20.4 billion. Due to the recent earthquake in Taiwan along with higher electricity costs, TSMC expects the second quarter gross margin to decline by 1.1 percentage points to 52% at the midpoint. Fortunately, the earthquake that occurred on April 3rd did not cause any power shortages, nor structural damage to the company’s facilities and critical tools such as extreme ultraviolet (EUV) lithography system. One of its closest competitors, Intel Corporation INTC, lost the lead because TSMC was the first to adopt EUV lithography systems that are essential for its leadership. Although some wafers were affected and had to be scrapped, most of the lost production should be recovered in current quarter, with minimal impact to revenue.

Outlook

With AI demand going strong, TSMC managed to weather the tapering off of pandemic-led electronics demand, fueling its stock to new heights. In 2025, TSMC is planning to begin mass-producing its 2-nanometer chips, which come with more power and efficiency compared to its current 3-nanometer ones. As for the full year, TSMC estimates revenue contribution from server AI processors to more than double. For the full year, TSMC guided for low to mid-20% revenue growth under the assumption that the AI market continues to expand while the PC market stabilizes, and the smartphone market returns to growth amid an improved macroeconomic backdrop. Although TMSC might not keep the pace with Nvidia in terms of near-term gains due to the fact its business goes beyond chips, it certainly won’t be in a recovery mode like its client, Qualcomm, after the 2023 lulled the smartphone market to sleep. Qualcomm is scheduled to report its fiscal second quarter results on May 1st. Best known for making smartphone chips, Qualcomm did surpass estimates with its fiscal first quarter financials and its upcoming report should reflect the business picking up as smartphone sales continue to recover.

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