At first glance, the selloff seen on Thursday in response to Taiwan Semiconductor's (TSM) results and guidance looks pretty baffling. After taking a look at both the recent and year-to-date performance of TSMC's shares, however, Thursday's 2.6% dip becomes more understandable.
TSMC, which has an estimated 55% share of the global chip foundry (contract manufacturing) market, reported its third-quarter revenue rose 22.5% annually to NT$260.4 billion ($8.07 billion), and its net income 28.4% to NT$96.8 billion ($3 billion). The former figure had already been telegraphed via monthly sales reports, but the latter beat an NT$95.2 billion consensus analyst forecast.
TSMC also hiked its full-year revenue growth guidance to a range of 11% to 12% from 5% to 10%, while citing strong demand for high-end smartphones. Q4 revenue guidance of NT$255 billion to NT$258 billion implies 26% annual growth at the midpoint.
The company is believed to be the sole manufacturer of the Apple (AAPL) A10 processor found in the iPhone 7, after jointly manufacturing the A9 processor found in the iPhone 6S with Samsung (SSNLF) . TSMC also manufactures chips for many Apple suppliers, such as Qualcomm (QCOM) , Cirrus Logic (CRUS) , Broadcom (BRCM) and InvenSense (INVN) . Even Intel (INTC) , which relies on its own plants to produce most of its chips, relies on TSMC to make the 4G modems found in some iPhone 7 models (Qualcomm supplies the rest).
Though not a blockbuster like the iPhone 6, all signs suggest the iPhone 7 has been selling better than originally expected. Moreover, Samsung's Galaxy Note 7 disaster will likely provide a shot in the arm to iPhone 7-Plus sales. Apple earnings and iPhone shipment estimates have been gradually moving higher, and will likely move higher still.
A breakdown of TSMC's Q3 sales, found in its earnings slides, provides additional evidence iPhone 7-related demand gave a big lift. Sales to Communication end-markets rose 19% sequentially, and made up 60% of total revenue.
TSMC's Q3 sales breakdown. Source: earnings slides.
In addition, sales for the Industrial/Standard segment, which were hurt earlier this year by a chip industry inventory correction, rose 16% sequentially and made up 21% of revenue. Consumer and Computer-related sales witnessed slower growth rates.
The problem is, markets have already priced in much of this. Apple is up 14% since the first reports of strong iPhone 7 pre-orders arrived on September 12. TSMC was up 10% since that date going into earnings, and 38% on the year.
Thus, TSMC fell 2.6% on Thursday in response to pretty good numbers. This gives an idea of how the bar has risen for Apple and many of the companies supplying it. Apple reports on the afternoon of October 25, while Qualcomm, Cirrus, Broadcom, Skyworks, Qorvo, InvenSense and NXP (NXPI) are among the chip suppliers with strong Apple exposure due to report in the coming weeks.
Given the iPhone 7's reception and Samsung's issues, there's a good chance Apple and many of the aforementioned suppliers will beat estimates and issue solid guidance. But judging by the reaction to TSMC's report, they might need to do more than just that to rally in response.