TSMC Q2 24 – Still Rolling

AI party spoilt by China.   

• TSMC reported good results and narrowed its guidance to the top end of the range in a move that added confidence that the AI bubble will not pop yet and prevented the Taiwan-listed shares of TSMC from emulating the 5% – 10% correction witnessed in US markets yesterday.
• Revenues / EPS were TWD593bn / TWD8.70 ahead of forecasts of TWD584bn / $8.31 as leading edge 3nm and 5nm demand continued to more than offset the usual seasonal weakness in smartphone demand.
• The company highlighted AI in its commentary and went on to state that it will be the main driver in H2 2024 and increased guidance for Q3 2024.
• Q3 2024 Revenues are expected to be around TWD741bn which is ahead of expectations of TWD660bn as demand for AI chips continues to outstrip supply.
• This is also underpinned by an increase in its capex forecast where it now expects to spend around $31bn compared to the previous mid-point which was at $31bn.
• This is only an incremental increase, but it does support the fact that there is no sign of demand weakening yet.
• This sets a pretty positive tone for the results season that is just kicking off and adds confidence to the idea that Nvidia will report another very strong set of results when it reports in August.
• It will also allow Google, Microsoft, Meta Platforms and so on to keep talking up generative AI when they report their results even though it makes up very little, if any, of their revenues.
• However, market sentiment has taken a hit over concerns around accelerated decoupling and isolation of the Chinese economy from the rest of the world hurting the outlook for companies that sell their products there.
• This is why GlobalFoundries which makes chips in Europe, the USA and Singapore and Intel were spared the battering that was metered out to the semiconductor industry yesterday.
• Furthermore, ASML is weak again today implying that TSMC’s results are not going to help those companies that are seen to have a very large exposure to China.
• I think that the market has overreacted to a certain degree as the foreign direct product rule (FDPR) (see here) is unlikely to be implemented in this case although the USA is likely to tighten restrictions on China somewhat in Q4 this year.
• The net result is that while the AI bubble is still in full swing, concerns over China have given the market an excuse to take some profit from anyone who has enjoyed an AI-related run and also has exposure to China.
• The decoupling is likely to continue and may even accelerate ensuring that no more global technology standards will be set.
• Hence, we are likely to see at least two (one for China and another for everybody else) which will fracture the global digital ecosystem.
• This is bad news for everyone as multiple incompatible networks tend to generate less value than a single network of the same size.
• This means less value creation and lower long-term growth for the technology sector.
• There are no real winners here no matter who wins the geopolitical struggle.