"The King of Chip Manufacturing" is well-deserved! The AI boom boosts TSMC's Q2 performance beyond expectations, raising its 2024 capital expenditure guidance

According to the Wise Finance app, the significant increase in global artificial intelligence investment has driven Taiwan Semiconductor (TSM.US), the "king of chip manufacturing," to achieve substantial growth in the second quarter of 2024. The financial report released by Taiwan Semiconductor on July 18 showed that Q2 revenue was NT$673.51 billion (approximately US$20.82 billion), a year-on-year increase of 40.1% and a quarter-on-quarter increase of 13.6%, exceeding analysts' average expectations of 35.5% year-on-year growth; net profit was NT$247.845 billion, a year-on-year increase of 36.3% and a quarter-on-quarter increase of 9.9%, higher than analysts' average expectation of NT$235 billion.

In Q2, gross profit was NT$358.125 billion, a year-on-year increase of 37.6% and a quarter-on-quarter increase of 13.9%; gross margin was 53.2%. Operating profit was NT$286.556 billion, a year-on-year increase of 41.9% and a quarter-on-quarter increase of 15.1%; operating profit margin was 42.5%. Earnings per share were NT$9.56, higher than NT$7.01 in the same period last year and NT$8.70 in the previous quarter; earnings per ADR were $1.48.

Taiwan Semiconductor pointed out in the financial report that in the second quarter, revenue contribution from the 3nm chip process accounted for 15% of total revenue, while the 5nm and 7nm chip processes contributed 35% and 17% of total revenue, respectively; revenue contribution from advanced technology (defined as 7nm and more advanced chip processes) accounted for 67% of total revenue.

Looking ahead, Taiwan Semiconductor expects third-quarter revenue to be between US$22.4 billion and US$23.2 billion, implying a year-on-year growth of 29.5% to 34.1%; third-quarter gross margin is expected to be between 53.5% and 55.5%; and third-quarter operating profit margin is expected to be between 42.5% and 44.5%.

Meanwhile, the construction of artificial intelligence infrastructure driving chip sales is boosting expectations for Taiwan Semiconductor's increased capital expenditure. Taiwan Semiconductor expects its full-year capital expenditure in 2024 to be between US$30 billion and US$32 billion, higher than the previous expectation of US$28 billion to US$32 billion. Taiwan Semiconductor stated that 70% to 80% of the 2024 capital expenditure will be used for advanced technology.

Taiwan Semiconductor stated that the capacity utilization rate of the 5/3nm chip process is already at 100%. For the 3nm chip process, in response to the accelerated expansion of demand from various manufacturers, monthly production capacity will gradually increase from 100,000 wafers in the second half of the year to around 125,000 wafers. Taiwan Semiconductor also expects the 2nm chip process to start mass production as early as the fourth quarter of 2025, with a target monthly production capacity of 30,000 wafers. Bloomberg Intelligence analyst Charles Shum pointed out that pricing for the 2nm chip process will be at least 15% higher than the 3nm chip process.

AI Boom Propels Taiwan Semiconductor's Stock Price Surge

Data shows that TSMC's US stocks have risen nearly 66% year-to-date. The stock hit a record high of $193.47 last Thursday, briefly pushing its market value above the trillion-dollar mark. Since the rise of the artificial intelligence boom at the end of 2022, TSMC's US stock price has more than doubled.

TSMC remains the core chip manufacturer for companies like Apple, NVIDIA, AMD, and Broadcom, especially for the data center server-side AI chips manufactured for NVIDIA and AMD. These chips are considered crucial hardware infrastructure for driving large artificial intelligence training/inference systems behind tools like ChatGPT.

The almost insatiable demand for NVIDIA's AI chips has supported TSMC's performance. Meanwhile, the broader smartphone market is on the path to recovery. Apple is planning to launch at least 90 million iPhone 16 devices in the second half of 2024, aiming to stimulate demand for the new product line with AI services, following a soft demand period for iPhones in 2023. This will also boost TSMC's performance as the chip manufacturer for Apple.

With decades of semiconductor manufacturing technology accumulation and being at the forefront of chip manufacturing technology innovation (pioneering the FinFET era, leading the 2nm GAA era), TSMC has dominated the majority of global chip manufacturing orders with its advanced processes and packaging technologies, especially for 5nm and below advanced processes.

The market currently believes that the demand for advanced process chips driven by the AI boom will enhance TSMC's bargaining power. Top Wall Street investment banks such as Citi, Goldman Sachs, and Morgan Stanley have raised their target stock prices for TSMC as a result.

In a report released earlier in July, Morgan Stanley pointed out that based on supply chain checks, most of TSMC's customers have agreed to raise manufacturing prices in exchange for reliable supply, which will further boost TSMC's gross margin. Analysts estimate that TSMC's gross margin will climb to 55.1% in 2025 and approach 60% in 2026, reaching 59.3%.

Industry insiders analyze that this price increase may be based on a comprehensive consideration of market demand, capacity, and costs. It is reported that major companies like Apple, Qualcomm, NVIDIA, and AMD have already booked TSMC's 3nm process capacity in large quantities, and the queue of customers is expected to continue until 2026.

However, due to investor concerns about increased US restrictions on semiconductor sales to China, most semiconductor stocks, including TSMC, experienced significant declines on Wednesday. TSMC's US stocks fell nearly 8% on Wednesday, while the Philadelphia Semiconductor Index dropped nearly 7%, marking the largest decline since March 2020.

Reports indicate that the US is considering strengthening export restrictions on advanced semiconductor technology to China. Meanwhile, former Republican presidential candidate Trump suggested that Taiwan, as a chip production center, should pay protection fees to the US because, in his view, Taiwan has taken away the US chip business This has exacerbated the selling of semiconductor stocks.

AJ Bell investment analyst Dan Coatsworth said, "Investors have become accustomed to the continuous good news in the tech sector, so even the slightest negative sentiment can catch people off guard and cause market panic."

In addition, a cautious attitude towards the artificial intelligence boom is beginning to emerge in various corners of the market. For example, Goldman Sachs strategists have indicated that investors are increasingly concerned about the excessive investment by U.S. tech giants in artificial intelligence. The research team at the firm stated that what strategists refer to as "mega-cap" companies — including Amazon, Meta, Microsoft, and Alphabet — have spent around $357 billion on capital expenditures and research and development in the past year, with "a significant portion" dedicated to artificial intelligence, accounting for nearly a quarter of the total capital expenditures and R&D spending of the S&P 500 index. Strategists noted, "The current mega-cap companies will eventually be required to prove that their investments will generate revenue and profits." "Early signs of potential failure may lead to valuation depreciation."