Taiwan Semiconductor Stock: Chipmaker Warns of Muted Industry Growth

Taiwan Semiconductor Manufacturing (NYSE:), a true juggernaut among artificial intelligence (AI) enabled hardware manufacturers, just filed its Form 20-F annual report for 2023. It’s a major event for the global chipmaker industry – not only based on the company’s results but also on Taiwan Semiconductor’s message about the market as a whole.

Since Taiwan Semiconductor is the biggest contract chipmaker on the planet, the company’s foundry supplies essential AI-compatible chips to tech businesses on multiple continents. Thus, even if you’re not directly invested in TSM stock, Taiwan Semiconductor’s recently filed report will almost certainly have ripple effects impacting your portfolio.

So, as Taiwan Semiconductor falls into the red today, consider the big-picture implications as well as the company-specific results. And, remember that an equities market that ascended on AI-hardware hype could just as quickly descend on AI-hardware disappointment.

Taiwan Semiconductor Continues Its Winning Streak

Even though TSM stock is down today, one can’t blame the company’s financial results for this. Taiwan Semiconductor has a stellar track record of quarterly EPS beats, and the company continued this winning streak with its expectation-beating first-quarter 2024 results.

Bear in mind, this is a challenging time for Taiwan-based businesses generally as the region recently weathered a massive magnitude 7.2 earthquake. This wouldn’t have impacted Taiwan Semiconductor’s first-quarter results, but some investors might worry about the impact of the current quarter.

Yet, in an almost miraculous recovery, Taiwan Semiconductor managed to achieve fabrication-tool recovery of more than 70% within 10 hours, followed by total recovery by the third day after the quake. This, hopefully, will ensure minimal operational impact on Taiwan Semiconductor’s second-quarter revenue.

However, it hasn’t been all bad news for Taiwan Semiconductor during the current quarter. In early April, the U.S. Commerce Department announced a $6.6 billion subsidy to Taiwan Semiconductor’s U.S.-based to facilitate advanced semiconductor production in the city of Phoenix, Arizona. This could prove to be a win-win for Taiwan Semiconductor and for the U.S. as the nation’s government strives to incentivize domestic AI-chip production.

What about Taiwan Semiconductor’s first-quarter 2024 results, though? As it turns out, there’s plenty of positivity to go around. Taiwan Semiconductor generated the equivalent of $18.87 billion in revenue, up 13% year over year. For the current quarter, Taiwan Semiconductor expects to report revenue from $19.6 billion to $20.4 billion – pretty optimistic guidance, considering the magnitude of the earthquake that just happened earlier this month.

The quake wasn’t the only headwind, by the way. Taiwan Semiconductor’s first-quarter results were also “impacted by smartphone seasonality, partially offset by continued HPC [high-performance computing]-related demand,” Wendell Huang, the company’s chief financial officer (CFO), explained in a statement.

Turning now to the bottom-line results, Taiwan Semiconductor reported a first-quarter 2024 net profit of 225.49 billion New Taiwan dollars (NT), or the equivalent of $6.97 billion in the U.S. That’s up 8.9% year over year, and it’s also ahead of the analysts’ consensus estimate of 215.40 billion NT. Looking at it another way, Taiwan Semiconductor posted earnings of $1.34 per share, versus Wall Street’s forecast of $1.30 per share.

Taiwan Semiconductor’s Market-Wide Warning

Overall, while acknowledging the company’s challenges, Huang seemed fairly confident about Taiwan Semiconductor’s growth prospects for the current quarter.

“Moving into second quarter 2024, we expect our business to be supported by strong demand for our industry-leading 3 nanometer and 5 nanometer technologies, partially offset by continued smartphone seasonality,” Huang clarified.

Again, one can refer to the company’s current-quarter revenue guidance and feel confident that Taiwan Semiconductor can demonstrate its resilience. This doesn’t necessarily mean that the global AI-hardware industry as a whole will grow as rapidly as previously anticipated, however. After all, the world’s chipmaking industry is still attempting to recover from last year’s chip oversupply.

If you’re wondering why TSM stock fell into the red today, it’s probably because of Taiwan Semiconductor’s indirectly stated warning about the global AI-chip market. In particular, Taiwan Semiconductor modified its forecast for 2024 overall chip-market growth (excluding memory chips) from “more than 10%” previously to 10% currently.

That’s not a very pessimistic outlook, really, but the market simply decided to see the glass as half-empty today. Apparently, 10% year-on-year growth isn’t good enough anymore, especially with AI-chip hype at full tilt during the past year.

Perhaps it’s a sign that the market expects too much and has pushed AI hardware stocks too high, too fast. Still, in light of Taiwan Semiconductor’s impressive quarterly results, it’s probably a fairly safe bet to hold a few TSM shares if you’re willing to ride out any current-quarter headwinds, anticipated or otherwise.