Financial Report Preview | AI boom is in full swing, Taiwan Semiconductor is making a fortune! Q3 profits are expected to surge by 40%

According to the financial news app Zhitong Finance, TSMC (TSM.US), the only chip foundry company for many US tech giants such as Apple, NVIDIA, and AMD, known as the "king of chip foundries," will announce detailed third-quarter financial results on Thursday. Last week, TSMC released incredibly strong September sales data. Combined with the previously released July and August data, analysts' calculations show that TSMC's sales in the entire third quarter far exceeded expectations. The market is currently focusing on profitability, with analysts generally expecting a 40% increase in TSMC's profits in the third quarter, thanks to the surging demand for AI chips from global enterprises and some government departments for TSMC's important clients such as NVIDIA, AMD, and Broadcom.

TSMC is currently the world's largest contract chip manufacturer. With the AI frenzy showing no signs of cooling down and continuing to sweep the globe, its clients such as NVIDIA and Broadcom, among other chip giants, have benefited from the surge in demand for AI chips, which are considered the most core infrastructure for AI. The increase in the scale of chip foundry contracts from these chip giants has driven TSMC's performance to continue to exceed expectations since last year, providing important logical support for the continuous record highs of TSMC's Taiwan and US ADR stock prices since last year.

TSMC has long been the core chip manufacturer for fabless chip design companies such as Apple, NVIDIA, AMD, and Broadcom, especially for data center server-side AI chips manufactured for NVIDIA and AMD, which are considered the most critical hardware infrastructure behind large AI training/inference systems driving tools like ChatGPT and Sora, and there is no other like it.

According to the latest compilation by LSEG of estimates from 22 analysts for TSMC's Q3 profits, it is estimated that TSMC will achieve a net profit of approximately 298.2 billion New Taiwan Dollars (about 9.27 billion US dollars) for the quarter ending on September 30. Generally, LSEG's SmartEstimates give more weight to the forecasts of analysts who are more accurate with historical data. In comparison, the net profit for the third quarter of 2023 is estimated to be about 211 billion New Taiwan Dollars, indicating a potential 40% year-on-year increase.

There is a significant difference in the market recently on whether the growth momentum of chip companies driven by the artificial intelligence boom can continue. TSMC's September sales data undoubtedly greatly alleviated investors' concerns about reduced spending on AI infrastructure. In its September sales report last week, TSMC stated that its overall sales for the third quarter had significantly increased when calculated in New Taiwan Dollars, easily surpassing market expectations.

Combining sales statistics for July and August, the latest quarterly sales figures for this core chip manufacturer for NVIDIA, AMD, and Apple were approximately 759.7 billion New Taiwan Dollars (about 23.6 billion US dollars) as of September, higher than the analyst's average expectation of 748 billion New Taiwan Dollars. This also means that TSMC's overall sales in the third quarter increased by 36.5% year-on-year, clearly exceeding TSMC's official forecast range in July, demonstrating that the demand for the most core infrastructure needed for artificial intelligence, AI chips, remains very strong. In the earnings conference call in July, TSMC management forecasted a sales range of 22.4 billion US dollars to 23.2 billion US dollars for the third quarter

Taiwan Semiconductor Holds Almost All Global AI Chip Capacity

"Most of Taiwan Semiconductor's core customers' products are closely related to AI, making Taiwan Semiconductor one of the biggest winners in the AI boom. Its core customers, including Apple, Nvidia, AMD, Qualcomm, and MediaTek, are all launching new products that heavily rely on Taiwan Semiconductor's cutting-edge chip manufacturing process," said Li Fang-kuo, Chairman of President Capital Management, in a media interview. "Therefore, I expect Taiwan Semiconductor's third-quarter profits to far exceed expectations."

In addition, Taiwan Semiconductor will update its quarterly and full-year sales outlook during Thursday's earnings conference call, including its capital expenditure expectations. Taiwan Semiconductor is working hard to expand its 3nm, 4nm, and 5nm chip manufacturing capacity, especially focusing on AI training/inference chip capacity to meet the almost endless demand from major customers like Nvidia, as well as expanding its CoWoS advanced packaging capacity - a crucial technology for Nvidia's Blackwell AI GPU capacity.

With decades of semiconductor manufacturing technology accumulation in the field, Taiwan Semiconductor has been at the forefront of semiconductor manufacturing technology improvement and innovation globally (pioneering the FinFET era and driving the start of the 2nm GAA era). It leads the world in advanced processes and packaging technologies among semiconductor manufacturers, with extremely high yields dominating the vast majority of global chip foundry orders, especially for 5nm and below advanced process chip foundry orders.

It is no exaggeration to say that Taiwan Semiconductor single-handedly controls the AI chip capacity of leaders like Nvidia, Broadcom, and AMD, holding almost all AI chip capacity globally. Wei Zhejia, the new "helmsman" serving as both Chairman and CEO of Taiwan Semiconductor, recently reiterated at the company's shareholder meeting his expectation that the iterative development of artificial intelligence technology will drive a strong recovery in the chip industry by 2024. Wei Zhejia also informed shareholders at the meeting that currently, almost all AI chips on the market are manufactured by Taiwan Semiconductor.

Currently, Taiwan Semiconductor, with its leading 2.5D and 3D chiplet advanced packaging, has secured almost all high-end chip packaging orders for 5nm and below processes in the market, and its advanced packaging capacity is far from meeting demand. The long-standing supply shortage of Nvidia's H100/H200 is largely due to the limited CoWoS packaging capacity at the 2.5D level of Taiwan Semiconductor. Major chip giants like Apple and AMD are shifting towards Taiwan Semiconductor's 3D-level advanced packaging capacity, which may further drive the shortage of Taiwan Semiconductor's advanced packaging capacity.

According to Wall Street analysts' expectations, starting from the fourth quarter of 2024, the continuous demand driven by Nvidia's new Blackwell architecture GB200 and AMD's new MI325 series will bring significant revenue contributions to Taiwan Semiconductor for 4nm or 3nm and below most advanced processes. The price increase for 3nm and some 2nm-level chip processes and CoWoS advanced packaging foundry services starting next year will contribute to a substantial increase in performance in 2025 and the following yearsThe current demand for AI chips can be described as extremely strong, and it is likely to remain so for a long time in the future. Lisa Su, CEO of AMD, recently stated at a new product launch event that the demand for data center AI chips, including AI GPUs, far exceeds expectations. It is projected that by 2027, the market size of data center AI chips will reach $400 billion, and further increase to $500 billion in 2028. This implies that the compound annual growth rate of the global data center AI chip market size from 2023 to 2028 is expected to exceed 60%.

In addition to chip foundries outside of China and Taiwan, the expansion of their scale is also a focus of the market. TSMC is currently investing billions of dollars in building new factories overseas, including investing $65 billion to build three chip manufacturing plants in Arizona, USA. However, the company stated that most of the chip manufacturing business and core advanced packaging capacity will remain in Taiwan.

During the latest earnings conference call in July, TSMC announced an upward revision of its full-year sales forecast and raised the capital expenditure range for this year to between $30 billion and $32 billion, compared to the previous forecast of $28 billion to $32 billion.

Wall Street remains bullish on TSMC, stock price gathers strength to break through previous highs

Top Wall Street investment banks have recently raised their target prices for TSMC's Taiwan-listed shares and TSMC's American Depositary Receipts (ADRs), indicating that the upward trend of TSMC's stock price is not stopping, and is once again challenging the trillion-dollar total market value. Since the beginning of this year, TSMC's ADR price has surged by over 85%, and is very likely to break the historical high of $192.845 set in July, with TSMC's ADR closing at $190.81 last Friday.

The core logic behind the Wall Street major banks' upward adjustment of TSMC's stock price lies in the unstoppable epic AI chip outsourcing orders brought by the AI boom, as well as the significant price increases expected for the most advanced 3nm and below chip manufacturing processes and CoWoS advanced packaging outsourcing by 2025, which are expected to significantly boost the company's performance and continue to raise its valuation.

Citigroup predicts that by the end of 2025, most of the global data center server AI accelerators, including new AI GPUs from NVIDIA and AMD, will migrate to the 3nm process, and some may even attempt TSMC's more expensive 2nm or 1.8nm processes. This will bring larger orders to TSMC, with the bank estimating that the utilization rate of its 3nm chip manufacturing process is expected to remain in a strong demand-supply imbalance at least until 2025.

In a research report, Morgan Stanley's analysis team stated that driven by strong demand for NVIDIA's AI chips and chip outsourcing needs from companies like Apple, TSMC may continue to achieve a compound annual sales growth rate of 15%-20% over the next five years. Morgan Stanley's analysis team also mentioned that with the incredibly strong demand for AI chips and the further increase in Apple's 3nm chip production, TSMC's gross margin may slightly increase from 55% in the third quarter to 55.5% in the fourth quarterThey also stated that Taiwan Semiconductor is expected to maintain its gross margin near its historical high levels in 2025 and beyond after successfully raising the prices of chip manufacturing and CoWoS advanced packaging in 2025.

In terms of stock price expectations, the Morgan Stanley analysis team raised the 12-month target price of Taiwan Semiconductor's Taiwan stock from 1220 New Taiwan Dollars to 1280 New Taiwan Dollars, reiterating their "overweight" rating and industry-leading position. In comparison, Taiwan Semiconductor's Taiwan stock closed at 1045 New Taiwan Dollars on Monday.

As for Taiwan Semiconductor's American Depositary Receipt (ADR) stock price, according to Tipranks' compilation of Wall Street analysts' expectations, the consensus rating is "strong buy," with an average target price of $205.00. This represents a potential increase of up to 7.44% in the next 12 months compared to the latest closing price of $190.81. The analysis team from the Wall Street financial services company Needham recently raised the 12-month target price of Taiwan Semiconductor's ADR from the previous $168.00 to a significant $210.00, while maintaining a "buy" rating on the stock. Another well-known institution, Susquehanna, reiterated a target price of $250 for Taiwan Semiconductor's ADR.