TSMC – Bottom canary.

TSMC Q3 23 revenue signals a potential bottom.

• TSMC reported its monthly sales for September implying that Q3 2023 revenues have declined by less than expected giving me some hope that the decline in the smartphone market may be drawing to a close.
• Implied Q3 2023 revenues were NT$546.7bn which was ahead of consensus of NT$531.5 but still represented a decline of 11% YoY.
• The big question mark here is to what degree has the seemingly unending demand for AI training chips offset weakness in smartphones and consumer electronics.
• At the moment, there is no way to know for sure as TSMC will not report its full earnings until 19^th October but I can make some educated guesses.
• Anyone who rings up Nvidia and asks for some AI training chips for immediate delivery will be told that the company is sold out into 2024.
• This means that relative to expectations given at the Q2 2023 results. AI revenues are unlikely to have changed much as even then, there was no extra capacity available for Q3 2023.
• Hence, even with stratospheric demand, I think it unlikely that much of the surprise has been caused by higher-than-expected sales of AI chips as there are no more available for sale.
• Hence, there is a good chance that the improvement of revenues relative to expectations is coming from the beginnings of stabilisation in consumer electronics semiconductor inventories.
• In the last 3 quarters consumer electronics demand has been hit especially hard by high inflation causing consumers to cut back on device replacements
• Component inventory corrections by device makers have also added to the problems.
• Device makers increased inventories during the pandemic due to strong demand and supply uncertainty but then reversed their positions to release cash as demand fell and supply improved.
• This has hurt suppliers upstream of device makers who have had to contend with both weak demand and an ongoing inventory correction.
• This is why it is these suppliers who have seen the largest YoY declines in revenue which have hurt both their revenues and their share prices.
• Furthermore, the inventory correction has lasted much longer than many expected which has forced suppliers to cut their forecasts with very little visibility of stabilisation let alone recovery.
• TSMC’s results are a sign that perhaps the inventory correction is at last coming to an end which will come as a welcome relief to the TSMC customers who do not sell AI training chips into the data centre.
• Many of these companies have given up trying to forecast when the situation will stabilise, but we might see better commentary when they report their results later this month.
• Top of the list here has to be Qualcomm which now trades at a discount to both MediaTek and TSMC but is very well positioned in the long term.
• There is no end in sight to its sales of 5G modems to Apple, It is winning enough deals in automotive to seriously disturb Mobileye and it is very well positioned for the Metaverse when or if it takes off.
• The problem is that the fickle market only cares about the weakness in the smartphone market meaning that from a long-term valuation perspective, the shares are on sale.
• There are a lot of risks, especially around China but Qualcomm has a better route out of problems in China than Apple has should the Chinese state start to properly retaliate against the sanctions that have been placed upon it.
• I already have a small position in Qualcomm and it is increasingly looking like, I should have some more.