TSMC Q3 2020 – Third quarter tealeaves.

TSMC points to more strength in the cloud.

• TSMC reported excellent Q3 2020 results and guidance but refused to be drawn on how much of this was increasing inventory building driven by fears of instability in the supply chain.
• TSMC Q3 2020 revenues / EPS were $12.41bn / $0.90 ahead of estimates at $11.93 / $0.81.
• It also raised its expectations for Q4 2020 where revenues are now expected to be $12.4bn – $12.7bn compared to consensus at $12.11bn.
• Overall TSMC expects to grow 30% YoY for the year as a whole.
• This has been driven primarily by its smartphone segment and high-performance computing (HPC) which is predominantly demand coming from cloud computing.
• In Q3 2020 the smartphone segment was called out as an area of strength despite analysis from Counterpoint continuously indicating that end demand has been and continues to be soft compared to last year.
• However, what we have seen in the market is a substantial degree of concentration of sales to the top 5 or 6 vendors with everybody else suffering as much as a 55% decline in shipments.
• TSMC also highlighted that inventory building as a result of supply chain uncertainties had been a factor during the quarter but would not be drawn on how much.
• This is pretty fair as there is no real way that TSMC can accurately calculate this, but it is clear that it has been a significant factor.
• This is not just Huawei (until 15^th September) but also other manufacturers who are moving to mitigate the risk of suffering Huawei’s fate or others who are generally uncertain with regard to the USA / China trade dispute.
• Consequently, the only reliable take-home message from TSMC’s numbers is that demand in the cloud remains very strong.
• This is not a big surprise rather than showing any signs of abating, the pandemic is looking like it will accelerate as winter approaches.
• Hence, the work-from-home and home-schooling trends are likely to continue and many companies are now looking at longer-term solutions to meet these trends.
• Hence, I think that Microsoft and Alibaba, in particular, will see very good revenue growth in Q4 2020 followed by AWS and IBM.
• AWS is by far the largest and is exposed far more generally and there are some areas of the cloud where spending has been diverted to enabling work from home and essential systems away from the more general migration to the cloud.
• Hence, some areas of AWS have been weaker as a result which has not been replicated at Microsoft.
• Microsoft is a smaller and more focused player than AWS which is why it has put up better growth numbers in the last 2 quarters.
• The outlook for smartphones is much less certain but it looks like there has been some rebound in Q3 2020 but not enough to make me lift my overall 2020 forecast of down 10%-20% for the market overall.
• Big tech continues to look very expensive and so I continue to have no desire to have a position here.