TSMC’s Outlook Disappoints as Global Tech Decline Continues

(Bloomberg) — A Taiwanese semiconductor manufacturer forecast worse-than-expected earnings for the current quarter, reflecting continued declining demand for everything from smartphones to server chips.

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Apple Inc. ’s most important chipmaker has warned that demand from the mobile and PC industries will remain “soft”, although the market is stable and will improve in the second half of the year. It is sticking with previous plans to spend $36 billion on upgrades and expansion through 2023.

The mixed outlook suggests that Taiwan’s biggest conglomerate — like other industries — is struggling with uncertainty about electronics demand in 2023 and beyond.

TSMC expects sales of $15.2 billion to $16 billion for the quarter, a shade below analysts’ average forecast of $16.1 billion. It gave that outlook after first-quarter net income beat lower expectations, suggesting it is keeping a lid on costs while leveraging its market leadership. It generally predicts overall margins of 52% to 54%, in line with the average rating of 52.5%.

Nvidia Corp., Intel Corp. and Advanced Micro Devices Inc. Including US clients and peers fell in pre-market trade. At the same time, makers of chipmaking equipment such as ASML Holding NV saw some gains after TSMC stuck to its capex plans, despite reports that the Taiwanese firm would cut costs.

“We are passing through the bottom of TSMC’s business cycle in the second quarter,” CEO CC Wei told analysts in a post-earnings conference call. But the PC and smartphone markets “continue to be soft at the moment.”

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A big question facing TSMC and its peers is the extent of the global tech slump and whether China’s economy will emerge stronger after abandoning Covid-zero restrictions. The company said Thursday that it expects a low-to-mid-single-digit revenue decline in 2023 — in line with estimates.

TSMC reported net income of NT$206.9 billion ($6.8 billion) in the March quarter, compared with analysts’ average of NT$194.2 billion. DSMC, which makes the most advanced chips for global electronics leaders from Apple to Nvidia, reported disappointing earnings three months ago.

DSMC’s market leadership helped boost its margins. On Wednesday, fellow industry bellwether ASML — the largest maker of equipment essential to advanced chipmaking — forecast better-than-expected June quarter earnings. But net bookings, a barometer of future growth, fell 46% from a year earlier. Another equipment supplier to TSMC is Lam Research Corp. It also projected adjusted earnings per share that missed the average analyst estimate.

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In the long term, investors believe TSMC will benefit from artificial intelligence development and an increase in the power demand of applications for high-end computer chips and datacenters needed to train and host AI models.

A boom in development has boosted sales of high-end chips since OpenAI’s ChatGPT technology proved its potential, helping to reduce the huge stock of chips held by customers since the Covid era. Inventory build-up was higher than expected in late 2022, executives said.

Here’s what Bloomberg Intelligence says

TSMC’s management’s decision to cut its 2023 sales target to 5% suggests that global smartphone and PC chip demand may be weaker than expected, something recent enthusiasm for AI-related semiconductors can hardly cushion. Demand is weak, and global supply chain deregulation could extend the process through much of the year.

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However, the outlook is clouded by geopolitical uncertainty, including global efforts to encroach on DSMC’s turf in advanced chipmaking and China’s growing military threats against Taiwan.

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

TSMC is pushing to manufacture its advanced chips overseas and is building more capacity in the US and Japan. Global policymakers and clients are increasingly wary of technological reliance on Taiwan, which Beijing claims is part of China.

It’s driving government funding: TSMC has applied for federal funding under the American Chips and Science Act — intended to lure advanced chipmaking back to American shores — and the Japanese government is helping pay half the cost of its $8 billion expansion.

–With assistance from Cindy Wang, Gao Yuan, Betty Hou, Peter Elstrom, and Sabrina Mao.

(Updates with US and European stock action from the fifth column)

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