Performance guidance is mixed, TSMC plunges, Wall Street: Not afraid! Huge advantages in the AI ​​wave

TSMC announced its first-quarter results on the 18th slightly exceeding market expectations, but executives mentioned soft demand for traditional server and automotive chips. The global wafer foundry industry's revenue growth expectations have been adjusted from the previously estimated 20% in January to 14% to 19%, and TSMC has not raised its capital expenditure expectations. Despite the negative news causing TSMC's US stocks to plummet by 5% at one point on Thursday, major Wall Street banks believe that TSMC executives' comments are generally positive, optimistic about TSMC's significant advantage in the AI wave.

Mixed Results Lead to Stock Price Decline

TSMC reported that its revenue for the first quarter of 2023 reached $18.87 billion, slightly exceeding market expectations. The gross margin was 53.1%, an increase of 0.1 percentage points from the previous quarter but a decrease of 3.2 percentage points compared to the same period last year. CFO and spokesperson Wendell Huang stated that due to strong demand for the 3nm and 5nm advanced processes, the company's operational performance is expected to improve in the second quarter, potentially offsetting the off-season impact of smartphone sales.

During TSMC's earnings conference call, Wei Zhejia pointed out that while demand in the artificial intelligence (AI) field remains strong and the smartphone market is gradually recovering, the demand for traditional servers remains weak, and the market expectations for automotive chips have shifted from growth to decline.

Huang Renzhao also mentioned that TSMC's capital expenditure for 2023 is expected to remain between $28 billion and $32 billion, with approximately 70% to 80% allocated to advanced process technology, 10% to 20% for mature and specialty process technology, and another 10% for advanced packaging testing and mask production. He emphasized that these expenditure plans are based on customer demand and growth expectations for the next few years. Wei Zhejia reiterated that TSMC's growth target for 2023 remains unchanged, with expected revenue growth in USD reaching 21% to 26%.

Due to the negative news impact, TSMC's US stocks fell by 5% at one point on Thursday, later narrowing to a 4.64% decline, closing at $132.58.

JP Morgan: AI Growth May Boost Future Expectations, Expects Price Range Volatility

JP Morgan stated that overall, TSMC's first-quarter performance and second-quarter 2024 guidance are in line with the bank's forecasts and slightly above market expectations, especially in gross margin after the earthquake in Taiwan on April 3.

JP Morgan said that despite increased power costs, earthquake-related expenses, and increased revenue from the 3nm process in the second quarter, TSMC's gross margin can still maintain elasticity. With the strong advancement of the 2nm process, it is expected that the first two years of wafer production will exceed that of 5nm and 3nm. TSMC expects revenue from the 2nm process to surpass that of the 3nm, and with better progress in technology development and pricing, it should have a better gross margin Taiwan Semiconductor Manufacturing Company (TSMC) has once again raised its expectations for the contribution of data center AI revenue, driven by strong demand for various AI applications. It is now expected that revenue will be in the low double-digit percentage range in 2024, reaching over 20% by 2028. JP Morgan stated that the shift in demand growth towards AI servers is very positive for TSMC as it implies a higher market share. JP Morgan believes that TSMC's market share in AI accelerators exceeds 95%.

However, TSMC's expected capital expenditure of $28-32 billion in 2023 is lower than JP Morgan's midpoint expectation of $32 billion. Nevertheless, JP Morgan mentioned that with the rapid advancement of the 2-nanometer process, there is still room for an increase in capital expenditure. With the ramp-up of 3-nanometer capacity and the transition from 5-nanometer to 3-nanometer production, it is expected that gross margin will face pressure in the second half of 2024.

JP Morgan believes that the sluggish demand for automobiles and smartphones is slowing down TSMC's recovery. Specifically, the recovery of logic semiconductor demand in 2024 is slow (currently at 10% growth, compared to the previous growth expectation of over 10%) due to the gradual recovery of smartphones, personal computers, conventional servers, and a decline in automotive demand.

To address cost inflation, TSMC will further raise prices, which JP Morgan believes should support a gross margin of over 53% in the coming quarters.

Overall, JP Morgan believes that consensus estimates may slightly increase by 1-2% in the future, reflecting stronger growth in the second quarter and better gross margins in the first half of the year. Although the failure to increase capital expenditure may have a slightly negative impact on the pace of recovery for general semiconductor demand, for the AI supply chain, TSMC's comments on the strengthening demand in 2024 and a compound annual growth rate of 50% from 2023 to 2028 are quite positive. Short-term stock price fluctuations are expected to be maintained, with an overweight rating.

UBS: Strong Performance in Mild Recovery, Stock Price Reasonably Priced

UBS stated that in the first quarter of 2024, TSMC's solid sales and profitability in high-performance computing (HPC) offset the impact of smartphones. Although TSMC's first-quarter sales decreased by 5.3% compared to the previous quarter, it was better than the predicted decline of 7%-11%, with high-performance computing accounting for 46% of sales, a 3% increase compared to the previous quarter.

Moreover, the slightly better-than-expected sales increase improved profitability, with a gross margin/operating profit margin of 53.1%/42.0%, higher than the median expectation of 53%/41%. UBS mentioned that this was due to cost control and non-operating income increasing earnings per share to 8.7 New Taiwan Dollars, higher than UBS/market expectations of NTD 8.54/NTD 8.22.

UBS stated that TSMC's growth prospects align with the bank's expectations for the second quarter and full year of 2024. The second-quarter guidance for 2024 expects a USD sequential growth of 4%-8%, benefiting from favorable exchange rate effects, slightly higher than UBS's expected sequential growth of 7%, driven by the strength of high-performance computing/artificial intelligence business, once again offsetting seasonal fluctuations in smartphones However, management pointed out that while smartphones are gradually recovering, personal computers are recovering slowly, general server demand is weak, and the performance of IoT and automotive sectors is soft. It is expected that this year will show a decline compared to previous growth expectations.

UBS stated that TSMC's gross margin guidance is 51%-53%, consistent with the bank's forecast of 51.8%, slightly lower than the market's expectation of 52.5%, due to the impact of earthquakes and rising electricity prices. UBS maintains the view that the gross margin in the second half of the year may remain at 51%-53%, mainly because the capacity of the 3nm process is gradually increasing and the transition from 5nm to 3nm process will have a negative impact on the gross margin. TSMC's ability to pass on inflationary effects through price increases is expected to help maintain its long-term gross margin target of over 53%.

At the same time, TSMC announced that capital expenditure will be maintained at $28-32 billion, consistent with UBS's expected midpoint of $30 billion. The capital intensity target remains at around 30%, with sales expected to grow by 2025, driving revenue from the 2nm process starting in the first quarter of 2026, in line with UBS's expectations.

Overall, UBS believes that TSMC is performing well in a moderate recovery. TSMC's strong growth and robust profit outlook, compared to the industry's moderate rebound and complete technological outlook, should support its stock price performance to continue to outperform the market. UBS believes that TSMC's current stock pricing is reasonable, with a 30% discount to the Philadelphia Semiconductor Index and only a 5% premium to the Taipei Stock Index, compared to a 20% premium since 2017.

Citi: No increase in capital expenditure is normal

Citi Group believes that TSMC's second-quarter revenue guidance is slightly better than expected, and gross margin guidance is in line with market consensus, due to the impact of earthquakes and rising electricity costs. The initial feedback on management comments is complex, as management has lowered growth expectations for semiconductors (excluding storage) and foundry industries due to continued weakness in smartphones and negative growth in the automotive business (2024), but remains confident in AI demand and maintains its outlook for full-year revenue growth.

Although TSMC has not raised expectations for capital expenditure, Citi states that in Asia, the lack of expected increase in capital expenditure is very common. However, in reality, Citi analysts have heard more speculation about increased capital expenditure mostly coming from US/European clients, believing that these speculations are for the early launch of the 2nm process, which has not happened.

Goldman Sachs: Expects packaging and testing capabilities to double again by 2025

Goldman Sachs stated that first-quarter performance exceeded expectations, revenue guidance was better than market expectations, and the lower end of the range matched the Goldman Sachs research department, with no surprises. The impact of rising electricity prices has sparked widespread discussion, and while the seasonal performance of smartphones is quite poor, demand is gradually recovering with the upgrade of AI smartphones.

Furthermore, Goldman Sachs mentioned that TSMC's strength in high-performance computing (HPC) has been reaffirmed, with many positive factors in the outlook for AI, almost completely dominating markets outside of mainland China. TSMC's senior management mentioned that mainland China remains one of the important sources of orders in the previous quarter, but also reaffirmed that mainland China is actively promoting the construction of capacity for 28nm and above processes In addition, Goldman Sachs expects that TSMC's capital expenditure will increase to $36 billion/$38 billion in 2025/2026.

Chip packaging and testing (CoWoS) has always been a key focus area for Goldman Sachs' research department. Goldman Sachs pointed out that investors have not paid enough attention to this area. Goldman Sachs believes that investors have not fully factored in the strong expansion expectations of TSMC's packaging and testing capabilities, and expects TSMC's packaging and testing capabilities to double again by 2025.

Goldman Sachs mentioned that TSMC's senior management has confirmed that there is a strong demand for advanced packaging, and the current supply is insufficient to meet the demand. Therefore, TSMC is collaborating with its packaging partners to meet the demand