TSMC’s outlook disappoints as global tech slowdown persists

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

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Apple Inc.’s main chipmaker warned that demand from the mobile and PC industries would remain “soft” for now, although the market stabilized and was likely to improve in the second half of the year. It is sticking to previous plans to spend as much as $36 billion to upgrade and expand capacity by 2023.

The mixed outlook suggests that Taiwan’s largest company – much like the rest of the industry – is grappling with uncertainty about demand for electronics in 2023 and beyond, as consumers and companies tighten their budgets to deal with soaring inflation and a potential global recession.

TSMC expects sales of $1[ads1]5.2 billion to $16 billion this quarter, a shade below the $16.1 billion analysts estimated on average. It issued that outlook after posting first-quarter net income that beat lowered expectations, suggesting it is keeping a lid on costs while taking advantage of market leadership. It estimates gross margins of 52% to 54%, generally in line with the average estimate of 52.5%.

U.S. customers and peers including Nvidia Corp., Intel Corp. and Advanced Micro Devices Inc., fell in premarket trading. Meanwhile, chipmaking equipment makers such as ASML Holding NV rose slightly after TSMC clung to its investment plans despite reports that the Taiwanese firm would cut spending.

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

TSMC continues to spend to capitalize on AI boom: Tim Culpan

A big question facing TSMC and peers is the extent of the global tech slowdown and whether China’s economy will bounce back strongly after dropping Covid Zero controls. The company said Thursday it expects a low- to mid-single-digit revenue decline in 2023 — roughly in line with estimates.

TSMC had net income of NT$206.9 billion ($6.8 billion) for the March quarter, compared with the NT$194.2 billion analysts estimated on average. TSMC, maker of the most advanced chips for global electronics leaders from Apple to Nvidia, had previously reported disappointing earnings for the three-month period.

TSMC’s market leadership likely helped bolster margins. On Wednesday, other industry watch ASML – the largest maker of equipment needed for advanced chipmaking – forecast better-than-expected June quarter sales. But net bookings, a barometer of future growth, plunged 46% from the previous year. Lam Research Corp., another equipment supplier to TSMC, also forecast adjusted earnings per share that missed the average analyst estimate.

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In the longer term, investors hope TSMC will benefit from an increase in artificial intelligence development and demand for applications for advanced data chips and data centers required to train and host AI models.

A boom in development since OpenAI’s ChatGPT demonstrated the technology’s potential is driving sales of advanced chips, which in turn are helping to reduce the huge stockpiles of chips that customers have held since the Covid era. This build-up in inventory had been larger than expected from the end of 2022, executives said.

What Bloomberg Intelligence Says

TSMC management’s decision to cut its 2023 sales target by up to 5% suggests that global demand for smartphones and PC chips may be much weaker than expected, a situation that the recent enthusiasm for AI-related semiconductors is doing little to dampen. The weakness in demand could potentially prolong the global destocking process in the supply chain over most of the year.

– Charles Shum, analyst

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

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

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

It’s driving government funding: TSMC has applied for federal funds under the US Chips and Science Act — intended to attract advanced chipmaking back 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 Hou, Peter Elstrom and Sabrina Mao.

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

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