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TSMC and Semis

Last week Taiwan Semiconductor Manufacturing Company, Limited (TSMC), the world’s largest contract chipmaker, fell sharply after announcing first quarter revenues in line with expectations, but lowering 2Q and full-year guidance on the back of weaker smartphone demand and uncertainties with crypto-miners.

TSMC reported a 6.1% y/y increase in revenues to $8.46bn for 1Q on the back of strong demand for IOT and crypto-related products; mitigating the seasonal slowdown in smartphones. March was actually the best month in the company’s history with $3.5bn of sales generated.

Bloomberg

However, TSMC surprised the market by lowering revenue guidance and increasing capex estimates for the remainder of the year. The company is now expecting 2Q net revenue of between $7.8bn and $7.9bn, a 7 to 8% sequential fall, and lower than analysts’ numbers of $8.8bn. It also reduced its 2018 revenue forecasts to 10% from previous guidance of a 10 to 15% range.

Another announcement that concerned analysts was TSMC’s comment that it would raise its annual capex forecast to between $11.5bn and $12bn, from its $10.5bn to $11bn estimate outlined just a few months ago. The combination of lower revenues and higher capex cost will certainty pressure the company’s gross margins going forward.

Additionally, TSMC lowered its 2018 assessment of the overall IC market and global foundry demand. It is now expecting semiconductor demand to grow at 5% this year, weaker than its previous forecast of 7% and decreased its growth for contract chip manufacturers to 8% from 10%. These overall industry comments pressured all global semiconductor names.

Some analysts, however, believe that TSMC’s problems are Apple, and smartphone, specific and the rest of their business is performing in line. TSMC is the exclusive supplier of the iPhone processor with Apple making up almost 20% of the contractor’s revenues. Over the last quarter, the market has realized that demand and production targets for the iPhone X were too optimistic, in addition to orders for the iPhone 8 series remaining soft.

However, some see this as being a temporary phenomenon with the next iPhone launch scheduled for later this year. Also, the weakness seen in cryptocurrency mining should be temporary and rebound later in 2018. The company has, understandably, been taking a conservative view to this new line of revenue generation because of the uncertainties of the regulatory environment.

Despite TSMC’s problems with Apple, there are still signs that the rest of the semiconductor industry is performing well, and that the sell-off in the rest of the global companies is unjustified. Last month, market research firm, IC Insights, increased its forecast for semiconductor growth this year to 15% from a previous estimate of 8%. They forecast DRAM sales growth to increase 37% from 13% and raised its NAND sales growth to 17% from 10%. This increase in demand and limited supply growth will lead to prices being much stronger in 2018 than originally forecast, the researcher said. It expects DRAM ASPs to increase by 36% this year after rising by 81% in 2017. Also, the capex increase from TSMC will flow through to the Japanese semiconductor equipment makers in the second half of 2018.

The Global Thematic Model Portfolio holds a basket of semiconductor-related names believing that supplier discipline and the demand for new products such as IOT, 5G and more sophisticated gaming and auto chips will continue to drive the cycle.

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