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TSMC's Strong Guidance Bodes Well for Apple, Nvidia, AMD and Others

The chip manufacturing giant hiked both its full-year revenue and capex guidance, as it continues seeing strong orders from smartphone, PC and data center chip clients.
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Business still looks very good for TSMC  (TSM) . And that probably says a lot about how business currently looks for major TSMC clients such as Apple  (AAPL) , Nvidia  (NVDA) , AMD  (AMD)  and Qualcomm  (QCOM) .

TSMC, the world’s top chip foundry (contract manufacturer), just reported Q3 revenue of NT$356.4 billion (up 22% annually and equal to $12.39 billion) and EPS of $0.90.

Revenue, which was already known via monthly sales reports, comfortably topped July guidance of $11.2 billion to $11.5 billion. EPS topped a FactSet analyst consensus of $0.84.

TSMC’s guidance was also strong. The company:

  • Guided for Q4 revenue of $12.4 billion to $12.7 billion -- up 29% to 33% annually and above a $12.02 billion consensus.
  • Guided for 2020 revenue to be up about 30%. That’s improved from July guidance for 20%-plus growth.
  • Guided for 2020 capital spending of about $17 billion, while citing the need to support elevated demand. This forecast is up from a July outlook of $16 billion to $17 billion, not to mention an April outlook of $15 billion to $16 billion.

TSMC’s stock is nonetheless down 0.6% in Thursday trading, amid a 0.9% drop for the Nasdaq. High pre-earnings expectations are undoubtedly a factor: Shares were up 53% on the year going into the Q3 report, leaving TSMC sporting a $400 billion-plus market cap.

The company’s strong Q4 outlook comes in spite of the fact that -- due to new U.S. sanctions against Huawei -- TSMC stopped shipping chip wafers to Huawei’s HiSilicon chip unit in mid-September. On the earnings call, CEO C.C. Wei confirmed that TSMC’s guidance assumes no Q4 shipments to HiSilicon, whose processors have been powering many of Huawei’s smartphones.

But while its business with Huawei has been halted, TSMC appears to be seeing strong orders from other major mobile chip clients, such as Apple, Qualcomm and Taiwan’s MediaTek.

With the production ramp for Apple’s iPhone 12 lineup kicking off in earnest in Q3, and with 5G phones estimated by TSMC to be packing 30% to 40% more chip content on average than comparable 4G phones, TSMC’s smartphone-related revenue rose 12% sequentially in Q3, and made up 46% of total revenue.

This disclosure follows Q3 guidance hikes from other Apple suppliers, such as NXP Semiconductors  (NXPI) , STMicroelectronics  (STM)  and Knowles  (KN) . TSMC-manufactured chips known or believed to be used by Apple’s iPhone 12 lineup include Apple’s A14 Bionic SoC -- made using TSMC’s N5 process, the first to rely on its cutting-edge, 5-nanometer (5nm), manufacturing process node -- as well as Qualcomm’s Snapdragon X55 5G modem and Cirrus Logic’s  (CRUS)  audio codec chips.

Strong demand for high-performance computing (HPC) products -- used by TSMC as a catch-all term to cover various PC and data center chips, along with certain other products -- is also a tailwind. HPC-related revenue, which involves clients such as Nvidia, AMD, Broadcom  (AVGO)  and Xilinx  (XLNX) , rose 25% sequentially and accounted for 37% of total revenue.

TSMC also reiterated that it expects HPC to be its largest growth driver over the next several years. Along with secular growth drivers for the likes of Nvidia and AMD, TSMC’s HPC-related sales stand to benefit in the coming years from the manufacturing setback Intel  (INTC)  has witnessed for its next-gen, 7nm, process node, which is seen as competitive with TSMC’s 5nm node -- both due to the share gains it could drive for AMD and other TSMC clients, as well as expectations that Intel will rely more on TSMC as it works to ramp 7nm production.

One negative from TSMC’s call: The company indicated customer inventories remain above normal seasonal levels, as clients contend with both COVID-related supply chain uncertainty and/or sanctions risks. However, TSMC also suggested it doesn’t expect a major inventory correction, forecasting inventories will remain above seasonal norms at year’s end and beyond.

“Looking ahead, we expect our customers' overall inventories to remain above their historical seasonal [levels] for a longer period of time, given the industry's continued need to ensure supply chain security amid...lingering uncertainties,” said Wei.