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TSMC's Solid Full-Year Guidance Helps Chip Stocks Rally Again

The chip manufacturing giant shared upbeat guidance amid strong orders from PC and data center clients. But the outlook does come with one important qualifier.
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For the time being, Taiwan Semiconductor  (TSM)  doesn’t see the COVID-19 pandemic preventing it from posting healthy double-digit sales growth this year.

TSMC, by far the world’s biggest chip contract manufacturer (foundry), is up over 5% in Thursday trading following its Q1 report. While Q1 revenue of NT$310.6 billion -- equal to $10.31 billion, up 45% annually and above prior guidance of $10.2 billion to $10.3 billion -- was already known thanks to monthly sales reports, TSMC also guided for Q2 revenue of $10.1 billion to $10.4 billion, which represents 32% annual growth at the midpoint and is above a consensus analyst estimate of $9.86 billion.

And on its earnings call, TSMC, which continues benefiting from the manufacturing technology lead it wrested from Intel  (INTC)  in 2018, said it currently expects its full-year revenue to be up by a mid-to-high teens percentage. While such an outlook implies a major second-half growth slowdown (amid tougher annual comparisons), it’s still somewhat favorable to a consensus for 15% growth.

TSMC added that in spite of the COVID-19 pandemic, it expects global chip sales (excluding memory chips) to be flat to down slightly this year, and that the broader foundry industry will grow by a high-single digit to low-double digit percentage.

TSMC also reiterated 2020 capital spending guidance of $15 billion to $16 billion (above 2019 capex of $14.9 billion and 2018 capex of $10.5 billion) as it adds more capacity for its popular 7-nanometer (7nm) manufacturing process node and commences volume production for its next-gen, 5nm, process node.

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The guidance has provided a fresh boost to many chip stocks. The Philadelphia Semiconductor Index is up 2.4%, and a number of TSMC clients and equipment suppliers, including AMD  (AMD) , Nvidia  (NVDA) , Applied Materials  (AMAT)  and KLA  (KLAC) , are sporting bigger gains.

There is one important qualifier to TSMC’s full-year sales guidance, however: The company says the outlook assumes that COVID-19’s impact will be “stabilizing in June.” There are some parallels here with the better-than-feared 2020 guidance shared last week by German software giant SAP  (SAP) , which assumes its demand environment gradually improves in Q3 and Q4 “as economies reopen and population lockdowns end.”

In addition, following comments from chipmakers such as NXP Semiconductors  (NXPI)  and Microchip Technology  (MCHP)  indicating that some of their customers are stockpiling inventory to protect themselves against supply disruptions, TSMC admitted that it expects customer inventories “to rise in [the] first half of 2020 before digesting in [the] second half of 2020.”

Echoing comments from companies such as Nvidia and Micron  (MU) , TSMC said it has seen improved demand lately for “high-performance computing” (HPC) products, a term it uses to describe chips used within either PCs or data centers. For now, notebook and cloud server spending are each benefiting from the impact COVID-19 lockdowns have had on remote work/learning activity and digital content consumption.

On the other hand, TSMC, whose mobile processor clients include Apple  (AAPL) , Qualcomm  (QCOM) , MediaTek and Huawei’s HiSilicon chip unit, admitted it’s seeing weaker end-market demand for smartphones and other consumer electronics products, as well as for cars. The company now expects smartphone unit sales to drop by a high-single digit percentage this year, with 5G phones (they contain more chip content on average) accounting for a mid-teens percentage of units.

Smartphone chips accounted for 49% of TSMC’s Q1 revenue. “HPC” chips accounted for 30% of revenue, and chips for industrial/IoT products, cars and non-smartphone consumer electronics made up most of the rest.