TSMC Slashes 2023 Revenue Outlook by 10%, Analysts Weigh In on Performance as Cyclical Headwinds Overshadow AI Strength

Needham analyst Charles Shi reiterated a Buy on Taiwan Semiconductor Manufacturing Company Ltd TSM with a price target of $118.00.

TSMC cut its 2023 revenue outlook from an MSD decline to a 10% downturn, citing cyclical headwinds overshadowing AI strength. Management still sees Q3 as the end of an inventory correction but believes customers may not build inventory back as fast as previously expected. 

On the bright side, TSMC sees only 6% of its revenue exposed to AI, including CPUs, GPUs, and AI accelerators, but estimates a 50% CAGR for AI revenue and expects it to reach a low-teens percent of the total by 2028. 

On the CapEx front, management left its target at $32 billion but said CapEx growth would decelerate and "level off" as TSMC starts to harvest the heavy investments made in prior years. 

It is the third cut to its revenue outlook that TSMC has made this cycle. The analyst sees that the lack of inventory rebuild through year-end will set up the company for solid growth in 2024 and encourage investors to look past the near-term results and buy the weakness today.

Susquehanna analyst Mehdi Hosseini had a Positive rating on the stock with a price target of $135.00.

TSMC's 2Q23 revenue came in at the high end of the guided range, surpassing expectations and driving an EPS beat.

The revenue recovery in the year's second half is progressing at a slower pace due to a lack of significant inventory refresh after a sharp correction in the first half.

New product ramps drive the projected 10-12% revenue growth in the second half compared to the first half, although there have been pushouts and weaker demand across most areas except AI.

The N3 ramps and slower utilization recovery in other nodes put pressure on the second-half gross margin.

TSMC's 2023 capex is likely at the lower end of the $32-$36 billion range due to a lack of skilled workers in the US and the higher wafer cost compared to Taiwan.

The long-term outlook for TSMC looks promising, with factors such as the doubling of COWOS capacity, new product ramps, growth in server AI processors, scaling of N3e in 2024, and strong earning power in the next up cycle estimated to be in the range of $8-$10 per share.

Wedbush analyst Matt Bryson maintained an Outperform rating and raised the price target from NT$650 (from NT$600).

TSMC's Q3 revenue will likely decline by around 10%, a significant downward revision from prior expectations.

Gross margin guidance for Q3 is 51.5%-53.5%, below the long-term target of 53%.

The ramp of TSMC's 3nm technology will likely impact gross margins in both Q3 and Q4, acting as a 300-400 basis points sequential headwind.

Management reaffirmed their long-term outlook for 15%-20% annual growth and 53% or higher gross margins.

AI sales will likely represent approximately 6% of TSMC's revenues in 2023, with a growth expectation of a 50% compound annual growth rate through 2027.

N3 technology is ramping well with good yield, and N3E has met performance and yield targets, paving the way for production ramp-up in Q4.

The positive long-term outlook is attributed to TSMC's leading-edge production capabilities, which will likely secure a higher share of advanced ICs and potentially lead the transition to 2nm technology in 2025/2026.

The stock remains optimistic despite the softer near-term outlook.

Price Action: TSM shares traded lower by 4.58% at $98.36 on the last check Thursday.