TSMC's outlook disappoints as the global tech recession continues

(Bloomberg) — Taiwan Semiconductor Manufacturing Co. forecast worse-than-expected revenue for the current quarter, reflecting continued slumping demand for everything from smartphones to server chips.

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The most important chip maker at Apple Inc. However, demand from the mobile and PC industries will remain “soft” for the time being, although the market has been stabilizing and is likely to improve in the second half of the year. It is committed to earlier plans to spend up to $36 billion on capacity upgrades and expansions in 2023.

The mixed outlook has Taiwan’s largest company — like the rest of the industry — grappling with uncertainty about electronics demand in 2023 and beyond, as consumers and businesses tighten their budgets to deal with soaring inflation and a potential global recession.

TSMC expects sales of between $15.2 billion and $16 billion in the quarter, which is a shadow of the $16.1 billion analysts expect on average. It gave that view after reporting first-quarter net income that beat lower expectations, suggesting it’s keeping costs in check while benefiting from its market leadership. It expects gross margins to range from 52% to 54%, generally in line with the average estimate of 52.5%.

US customers and their counterparts including Nvidia Corp. and Intel Corp. and Advanced Micro Devices Inc. Retreat in pre-market trading. Meanwhile, chipmaking equipment makers such as ASML Holding NV posted slight gains after TSMC stuck to its capital plans despite reports that the Taiwanese company would cut spending.

“We’re at the bottom of TSMC’s business cycle in the second quarter,” CEO CC Wei told analysts on a post-earnings conference call. But the PC and smartphone markets “are still weak for the time being.”

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One of the big questions that TSMC and its peers face is the extent of the global technological downturn and whether the Chinese economy will bounce back after abandoning Covid Zero controls. The company said Thursday that it expects a low-to-mid single-digit decline in revenue in 2023 — roughly in line with estimates.

TSMC reported net income of NT$206.9 billion ($6.8 billion) for the March quarter, compared to the $194.2 billion expected by analysts on average. TSMC, which makes the most advanced chips for global electronics leaders from Apple to Nvidia, reported disappointing revenue for the three-month period.

TSMC’s leadership in the market likely helped support its margins. On Wednesday, industry leader ASML — the largest maker of equipment critical to the advanced chip industry — forecast revenue for the better-than-expected June quarter. But net bookings, a measure of future growth, were down 46% from a year earlier. Lam Research Corp., another equipment supplier to TSMC, also forecast adjusted earnings per share, which missed the average analyst estimate.

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In the long term, investors hope that TSMC will benefit as an increase in the development of AI and power applications required for edge computing chips and data centers required for training and hosting AI models.

A breakthrough in development since OpenAI’s ChatGPT has demonstrated the technology’s potential to drive sales of high-end chips, which in turn is helping to reduce the huge chip inventories customers have held since the Covid era. Executives said that inventory backlog was larger than expected in late 2022.

What Bloomberg Intelligence says

TSMC management’s decision to cut its 2023 sales target by as low as 5% suggests that global demand for smartphones and PC chips may be much weaker than expected, a situation that recent enthusiasm for AI-related semiconductors can hardly mitigate. Weak demand could extend the destocking of the global supply chain through most of the year.

Charles Shum, analyst

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However, the outlook remains clouded by geopolitical uncertainties, including global efforts to encroach on TSMC’s advanced chip industry and China’s growing military threats against Taiwan.

Warren Buffett said in a recent interview that he pulled the majority of Berkshire Hathaway Inc’s $4.1 billion stake in TSMC in part because of geopolitical concerns.

TSMC is under pressure to produce its advanced chips abroad and is building more capacity in the United States and Japan. Global policymakers and customers are increasingly wary of their technological dependence on Taiwan, which Beijing has claimed as part of China.

That’s the drive for the government funding: TSMC has applied for federal money under the US Chip and Science Act — intended to lure the advanced chip industry to American shores — and the Japanese government is helping pay half the cost of its $8 billion expansion there.

— With assistance from Cindy Wang, Gao Yuan, Betty Hu, Peter Elstrom, and Sabrina Mao.

(Updates with U.S. and European participation procedures from fifth paragraph)