TSMC: Is the "Anchor of Stability" Already Invincible?

Taiwan Semiconductor Manufacturing Company (TSMC) released its Q4 2024 financial report (ending December 2024) before the U.S. stock market opened on January 16, 2025, Beijing time. The key points are as follows:

1. Revenue: Both volume and price increased, reaching new highs. TSMC's revenue for Q4 2024 was USD 26.88 billion, setting a new record and approaching the upper limit of the revenue guidance range (USD 26.1-26.9 billion). This quarter's revenue grew by 14.4% quarter-on-quarter, with a +2.4% impact from shipment volume and a +11.7% impact from average selling price. Driven by the shipment of new Apple devices and demand for computing chips, the company achieved growth in both volume and price this quarter.

2. Gross profit and gross margin: Average price increase is the main driver of gross margin. TSMC's gross margin for Q4 2024 was 59%, reaching the upper limit of the guidance range (57-59%). The increased proportion of 3nm and 5nm products drove the average selling price of the company's products higher. The increase in average price fully covered the rise in costs, further boosting the company's gross margin.

3. Wafer structure: 60% of revenue comes from 5nm and below. Smartphones and high-performance computing were the main sources of revenue growth for the company this quarter. Notably, the new Apple iPhone 16 series is equipped with 3nm chips, directly increasing the proportion of 3nm revenue to 26% this quarter. Coupled with the demand for computing chips like NVIDIA's Blackwell, the company's revenue proportion from 7nm and below has now risen to 74%. With the support of American clients like Apple and NVIDIA, the company's revenue proportion from North America further increased to 75% this quarter.

4. TSMC's performance guidance: For Q1 2025, expected revenue is USD 25-25.8 billion (market expectation: USD 24.5 billion) and gross margin is 57-59% (market expectation: 56.8%). Revenue is expected to decline by 4%-7% quarter-on-quarter, mainly due to the seasonal decline in demand for Apple smartphones in the first quarter. The gross margin is expected to remain stable, primarily supported by strong demand for 3nm and 5nm products.

Overall view from Dolphin: TSMC's performance this quarter is quite good.

The company's revenue and gross margin both reached the upper limit of its previous guidance, mainly benefiting from the shipment of new Apple devices and sustained demand for computing chips, which drove the company's chip products to achieve growth in both volume and price this quarter.

In terms of product segmentation, $Taiwan Semiconductor(TSM.US) saw the proportion of 7nm and below processes further increase to 74% this quarter, particularly with strong demand for 3nm and 5nm products In the current market for 5nm and below, TSMC is basically in a unique position as Intel transitions from competitor to customer and Samsung struggles to catch up.

For the next quarter, the company has provided a revenue guidance of $25-25.8 billion and a gross margin guidance of 57-59%. This appears to be significantly better than the consensus expectations from market sell-side analysts, but compared to the core sell-side and buy-side expectations we have seen (a quarter-on-quarter decline of 1% to 4%), the actual revenue guidance indicates a decline of about 4-7%, which is not particularly good.

One possible reason for the decline is the seasonal drop in demand for Apple products, as the first quarter is traditionally the company's off-season. Additionally, the Blackwell chips have not yet entered mass production. However, from this guidance, the revenue decline is not large, and the gross margin can basically be stabilized, indicating the company's confidence in the demand for computing power chips.

Dolphin believes that TSMC's stock price can see a significant increase in the US night market, mainly due to the confidence conveyed during the conference call:

1) Key Point: Operating Expectations for 2025: With a projected year-on-year growth of 30% in 2024, the company expects the revenue growth rate for the entire year of 2025 to reach around 25% (better than the market expectation of 20%+), providing the market with a "reassurance." Additionally, the company's 2nm advancement is progressing smoothly and is expected to begin mass production in the second half of 2025;

2) Increased Capital Expenditure: The company's capital expenditure for 2025 will further increase, reaching $38-42 billion (better than the market expectation of $38-40 billion). The company's total capital expenditure for 2024 is only $29.7 billion, and the significant increase in capital expenditure for 2025 also indicates the company's positive expectations for advanced processes, as the company will further expand its investments;

3) Addressing Market Rumors: Previously, there were rumors in the market about the company's customer CoWoS cutting orders and slowing down expansion. The company has responded directly, stating that CoWoS is still in short supply overall, and customers transitioning from CoWoS-S to CoWoS-L does not represent order cuts.

From the company's growth expectations for 2025 and capital expenditure, in addition to dispelling market rumors, it reflects the company's confidence in AI computing power demand and the mass production of the 2nm process, which is expected to further widen the gap between the company and its competitors.

Overall, as a stabilizing force in the semiconductor industry, although there are slight flaws in the first-quarter guidance, the stable performance in the fourth quarter and the optimistic planning and guidance for the entire year can persuade investors not to overly magnify short-term quarterly fluctuations, but to focus on the optimistic judgments revealed in the annual planning.

The core logic behind this is that as Intel and Samsung's momentum weakens, the company holds an absolute leading position in the current 5nm and below foundry market, winning high-quality customers and industry chain influence. In the AI race, regardless of the competition for GPUs and ASICs, TSMC is an indispensable "golden shovel." As long as the demand for computing power chips continues, TSMC's performance growth is the most certain. The following is Dolphin's specific analysis of TSMC:

1. Revenue: Both volume and price increase, reaching new highs

TSMC achieved revenue of USD 26.88 billion in the fourth quarter of 2024, setting a new record, close to the upper limit of the revenue guidance range (USD 26.1-26.9 billion). This quarter's revenue grew by 14.4% quarter-on-quarter, mainly driven by the shipment of new Apple devices in North America and the demand for computing chips from downstream customers like NVIDIA.

TSMC's quarterly revenue has been fully anticipated by the market due to the monthly operational metrics released. How did the price and shipment volume change in TSMC's revenue this quarter?

Dolphin observes the main drivers of TSMC's revenue growth in the fourth quarter from the dimensions of volume and price:

1) Volume dimension: In Q4 2024, TSMC's wafer shipment volume was 3,418 thousand pieces, a quarter-on-quarter increase of 2.4%. The continued growth in shipment volume is mainly driven by the shipment of new Apple devices and the demand for high-performance computing. With the increase in shipment volume, the company's capital expenditure also saw an uptick at the end of the year. TSMC's capital expenditure this quarter was USD 11.23 billion, which is relatively high for a single quarter, but the total capital expenditure for 2024 is USD 29.76 billion, still slightly below the company's previous expectation of "slightly above USD 30 billion."

2) Price dimension: In Q4 2024, TSMC's revenue per wafer (equivalent to 12-inch wafers) was USD 7,864 per piece, an increase of 11.7% quarter-on-quarter. The average selling price of TSMC's wafers rose mainly due to the increased proportion of 3nm and 5nm processes this quarter. The revenue from processes below 7nm has increased to 74% this quarter.

Combining TSMC's guidance for the next quarter, the expected revenue for Q1 2025 is USD 25-25.8 billion (a quarter-on-quarter decline of 4%-7%). The company's revenue in the first quarter is affected by the seasonal decline in demand for Apple smartphones, but with the demand for computing chips, the decline in revenue is not significant.

2. Gross profit and gross margin: Average price increase is the main driver of gross margin

TSMC achieved a gross profit of USD 15.86 billion in the fourth quarter of 2024, a quarter-on-quarter increase of 16.7%. The significant increase in gross profit is mainly driven by the growth in both revenue and gross margin. In Q4 2024, TSMC's gross margin was 59%, an increase of 1.2 percentage points quarter-on-quarter, slightly better than market expectations (58.5%), mainly due to the growth in shipments of 3nm and 5nm chips driving the overall average price of the company's products.

The two most concerning data points for TSMC in the market are revenue and gross margin. Due to the monthly operational data releases, quarterly revenue has basically been anticipated by the market. The gross margin, however, is one of the focal points in this quarterly report. Dolphin will analyze the main drivers for the increase in gross margin this quarter:

“Gross Margin = Revenue per Wafer - Fixed Costs - Variable Costs”

1) Revenue per Wafer (equivalent to 12 inches): In Q4 2024, TSMC's revenue per wafer is approximately $7,864 per wafer, an increase of $824 per wafer quarter-on-quarter. With the shipment of Apple smartphones and computing chips, the combined proportion of 3nm and 5nm reached a record high of 60% this quarter, further driving up the average selling price of the company's products;

2) Fixed Costs (Depreciation and Amortization): In Q4 2024, TSMC's average fixed costs are approximately $1,543 per wafer, a decrease of $16 per wafer quarter-on-quarter. Although the total depreciation and amortization continues to increase due to capital expenditures, the rapid increase in product shipment volume has led to a decrease in unit fixed costs;

3) Variable Costs (Other Manufacturing Expenses): In Q4 2024, TSMC's average variable costs are approximately $1,682 per wafer, an increase of $272 per wafer quarter-on-quarter. As the proportion of 3nm and 5nm products increases, unit variable costs show a trend of rising;

In summary, TSMC's gross margin per wafer in Q4 2024 is $4,640 per wafer, an increase of $568 quarter-on-quarter. Although the unit cost of the company's products has increased, the increase in average selling price fully covers the company's cost side, resulting in a continued increase in unit gross margin. In this quarter, the unit price of the company's products increased by $824, while the unit cost increased by $256.

The revenue performance of TSMC was previously anticipated by the market, while the gross margin is the main focus. With the growing demand for 3nm and 5nm, the average selling price of the company's products continues to rise, and the company's gross margin has also significantly improved. Considering the company's guidance for the next quarter of 57-59%, although there will be a seasonal decline in demand from Apple, the demand for computing chips from companies like NVIDIA will help maintain the company's gross margin. Dolphin expects that the proportion of products below 7nm will still be maintained at over 70% in the next quarter.

3. Wafer Structure: 60% of 5nm and below

3.1 Revenue Proportion by Application Type

Smartphones and HPC are TSMC's largest sources of revenue, accounting for a combined 88%, making them the largest source of downstream revenue for the company.

In terms of downstream application segmentation, with the increase in shipments of new Apple devices this quarter, the smartphone business's proportion has risen to 35%.

The share of the company's high-performance computing remains the largest this quarter, reaching 53%. The company's revenue this quarter is mainly driven by these two segments, with smartphone business growing 17.7% quarter-on-quarter and high-performance computing growing 18.9% quarter-on-quarter Dolphin believes that the company's guidance for a quarter-on-quarter decline in revenue for the next quarter is mainly influenced by the smartphone business, where demand from Apple is facing seasonal declines. However, the demand for high-performance computing remains strong, primarily driven by the demand for NVIDIA's Blackwell and certain Intel chip products.

3.2 Revenue Share by Wafer (by Process Node)

This quarter, the revenue share from nodes below 7nm continues to rise to 74%, with advanced process revenue now being the core source for the company. Specifically, the revenue share from 3nm this quarter increased to 26%, while the revenue share from 5nm rebounded to 34%.

With the new iPhone 16 series from Apple featuring 3nm chips, the company's 3nm share further increased this quarter. Additionally, driven by demand for computing chips, the share of 5nm and below reached a record high, totaling 60%.

Considering the company's revenue guidance for the next quarter, the quarter-on-quarter decline in revenue is mainly affected by seasonal fluctuations in Apple’s demand. At the same time, NVIDIA's Blackwell products, Qualcomm and MediaTek's flagship products (demand for N3E), as well as certain Intel chip products, will also fill the utilization rate of the company's related advanced processes. Although the company's revenue has declined, the advanced processes will still maintain a high utilization rate.

3.3 Revenue Share by Wafer (by Region)

From the revenue perspective by region, North America remains TSMC's largest source of income, with the revenue share increasing to 75%. This is due to major clients in North America such as Apple, NVIDIA, AMD, and Qualcomm, creating a strong commercial binding relationship between TSMC and the United States. Apart from North America, China and the Asia-Pacific region are the other two major sources of revenue, accounting for 9% and 9% respectively this quarter. Driven by the shipment of new Apple devices and demand for computing chips from NVIDIA, the revenue share from North America has increased again.

Considering the situation of various companies and the industry chain, Dolphin believes that the current semiconductor market demand still shows structural characteristics. Traditional processes are affected by cycles and have not shown significant signs of recovery. Apart from the cyclical impact of the new Apple device launch, the current semiconductor demand mainly lies in the demand for high-end process chips in the computing chip sector.

As for the GPU versus ASIC debate, both camps are actually core customers of TSMC. Therefore, the manufacturing segment of AI computing chips cannot bypass TSMC, and the company remains the most certain player in the computing industry chain. According to the company's expectations, revenue growth is expected to reach around 25% by 2025, with the incremental growth mainly coming from the demand increase in the computing sector .

Dolphin's research on TSMC and the wafer manufacturing industry

TSMC

October 17, 2024 Conference Call: "TSMC: No intention to acquire Intel at all (FY24Q3 Conference Call Summary)"

October 17, 2024 Earnings Report Commentary: "ASML brings down AI? TSMC to the rescue!"

July 18, 2024 Conference Call: "TSMC: Full-year revenue growth over 20% (24Q2 Conference Call Summary)"

July 18, 2024 Earnings Report Commentary: "ASML and Trump continuously 'feinting'? TSMC 'to the rescue' what else to fear!"

April 18, 2024 Conference Call: "TSMC: Capital expenditure unchanged, maintaining original plan (FY23Q4 Conference Call Summary)"

April 18, 2024 Earnings Report Commentary: "TSMC: iPhone underperforming, NVIDIA to the rescue"

January 18, 2024 Conference Call: "AI is the strongest driving force for future growth (TSMC 23Q4 Conference Call)"

January 18, 2024 Earnings Report Commentary: "TSMC: 3nm charging ahead, Intel 'sending spring breeze'"

October 20, 2023 Conference Call: "3nm ramping up, planning to enter 2nm (TSMC 23Q3 Conference Call)"

October 20, 2023 Earnings Report Commentary: "TSMC: Survived the 'performance bottom', 3nm battle song begins"

July 20, 2023 Conference Call: "TSMC: AI crazily boosting, 3nm finally landing (2Q23 Conference Call)" Financial report review on July 20, 2023: "TSMC: NVIDIA to the rescue, AI supports the 'cyclical' bottom"

Conference call on April 20, 2023: "Clear bottom in the second quarter, 3nm mass production imminent (TSMC 23Q1 conference call)"

Financial report review on April 20, 2023: "TSMC: The strongest king, also struggling with cyclical fluctuations"

Conference call on January 12, 2023: "Inventory adjustment will continue for half a year, growth expected in the second half of the year (TSMC 22Q4 conference call)"

Financial report review on January 12, 2023: "The thunder of TSMC, even Buffett's increased holdings cannot suppress"

TSMC conference call on October 13, 2022: "Despite impressive financial reports, TSMC cannot avoid industry decline (Third quarter conference call)"

Financial report review on October 13, 2022: "TSMC: How long can the 'lone hero' in the dark night last?"

TSMC conference call on July 14, 2022: "How will TSMC sustain growth in a semiconductor downturn? (TSMC conference call)"

Financial report review on July 14, 2022: "TSMC: The 'alternative' backbone in the wave of order cuts"

TSMC conference call on April 14, 2022: "On track for 2nm (TSMC conference call)"

Financial report review on April 14, 2022: "TSMC: Strong 'faith', unaffected by cycles"

In-depth analysis of TSMC stock on April 8, 2022: "TSMC (Part 2): Price discounts, unwavering faith" On March 16, 2022, TSMC stock in-depth article: After the market crash, let's talk about the legendary foundry king TSMC

On January 13, 2022, TSMC conference call: What did TSMC management talk about after giving a strong quarterly guidance?

On January 13, 2022, TSMC earnings report commentary: TSMC is too strong, the "cycle" will take a detour

On October 14, 2021, TSMC earnings report commentary: TSMC: The leader is still leading, the momentum remains

Semiconductor/Wafer Manufacturing Industry

On December 29, 2022, semiconductor industry overview: Semiconductor avalanche? True elasticity will only come after the most severe decline

On June 24, 2022, semiconductor industry overview: Cut orders, cut orders, cut orders, is the semiconductor really going to "change"?

On September 3, 2021, wafer manufacturing industry overview: Performance up vs stock price down: Should SMIC and others be "killed" or "wrongly killed"?

Risk disclosure and statement of this article: Dolphin Investment Research Disclaimer and General Disclosure