World’s largest chipmaker TSMC sets new record in Q2

July 27 2022

When the world’s largest chipmaker – Taiwan Semiconductor Manufacturing Company (TSM) or TSMC as abbreviated – posts record profit amid fears over weak demand, it definitely is a positive sign for the entire industry. Literally helping the world run, its semiconductor chips power our smartphones, cars, laptops, refrigerators, data servers and whatnot. Most of the chip-making around the globe is outsourced to foundries or fabs, like TSMC, where silicon wafers are produced.

Industry Overview

Semiconductors have finally cemented their “critical” status as a true necessity, despite the fact that it took recent chip shortages to do so. The global semiconductor market will reach over US$600 billion in 2022, up 10% from the previous year. According to IC Insights, the semiconductor businesses anticipate boosting their R&D budgets by 9% in 2022. Additionally, they predict that between 2022 and 2026, CAGR for the industry is likely to increase by almost 5.5%.

According to Deloitte estimates, the chip scarcity over the past two years cost the semiconductor industry and its customer industries more than US$500 billion in lost revenue, with lost auto sales totalling more than US$210 billion in 2021 alone. Chips are becoming increasingly more significant in various industries, thanks to rising semiconductor content in a variety of products, appliances and vehicles, in addition to the usual suspects of computers, phones, and data centres. However, it is expected that the shortages and supply chain problems will continue until the second half of 2022 before abating in 2023.

According to a report by Statista, at 53.6%, TSMC accounts for more than half of the global semiconductor market, followed by Samsung at 16.3%, UMC at 6.9%, GlobalFoundries (GFS) at 5.9% and SMIC at 5.6%. Companies from Taiwan, China, and South Korea account for roughly 90% of the global foundries market.

Exhibit 1: Semiconductor Foundries Market Share Worldwide (Q1 2022)

Source: Statista.com, July 2022

TSMC and Samsung were the only two major players to manufacture global smartphone chipsets during Q1 2022. Of this, TSMC reportedly controlled 70% of the application processor (AP), system-on-chip (SoC) and cellular modems going into smartphone chipsets, while Samsung Foundry came in second with a 30% market share, leaving almost no share in the market for other players.

TSMC’s earnings highlights

The three months ended 30 June, 2022 were a record quarter for TSMC in terms of net income that jumped 76.4% to NT$237.03 billion, or US$1.55 per ADR unit. The market-beating earnings were supported by a steady demand for its advanced chips used in electric vehicles and data centres.

Exhibit 2: TSMC’s 2Q22 Revenue and Net Income

Source: Company Financials, Refinitiv, July 2022

Demand for hi-tech chips drives revenue growth

The Taiwanese chipmaker’s second-quarter revenue rose 43.5%, year-on-year, to NT$534.14 billion – way ahead of market expectations of NT$524.02 billion. In terms of U.S. dollars, quarterly revenue increased 36.6% to US$18.16 billion. Advanced technology, consisting of 5 and 7 nanometre (nm) chips, represented more than half of the total wafer revenue of the company.

By platform, high-performance computing contributed to most of (43%) TSMC’s total revenue. The second highest contribution came from smartphone chips, accounting for 38% of the revenue. Since Apple Inc (AAPL) is the leading customer of TSMC, these results also indicate a strong and steady demand for iPhone 13 in the current uncertain economic environment.

Exhibit 3: TSMC’s Net Revenue Contribution by Platform (in percentage)

Source: Company Financials, July 2022

Strong U.S. dollar boosts TSMC’s profit margins

A strong U.S. dollar also helped the Taiwanese foundry to pocket higher profits, with 64% of its total revenue coming from North America. The second-quarter gross margin at 59.1% came in 3.5 percentage points higher than the first quarter. This is significantly higher than the 50% gross margin reported in the second-quarter of 2021. Moreover, operating margin also increased to 49.1% in the second-quarter of 2022 from 39.1% last year.

Exhibit 4: TSMC’s Quarterly Gross Margin and Operating Margin (in percentage)

Source: Company Financials, July 2022

TSMC sees higher chip sales in third-quarter

For the third-quarter of 2022, TSMC expects revenue between US$19.8 billion and US$20.6 billion – way above the US$14.88 billion reported a year ago. The company also raised its 2022 revenue growth outlook to mid-30s from the prior forecast range of 26%-29%. In addition, gross profit margin is expected to be between 57.5% and 59.5% for the third quarter, whereas the operating profit margin for the same period is expected to be between 47% and 49%.

TSMC confident about its long-term prospects

Pandemic-fuelled demand for smartphones and laptops caused many customers of TSMC to stockpile chips. Now with the demand cooling down due to inflationary pressures, TSMC signalled that its consumer electronics clients may reduce their chip inventories over the next few quarters into 2023. However, the management is “highly confident” about its long-term prospects, given the rising appetite for cloud services and electric vehicles.

During the earnings call, TSMC’s CEO, C.C. Wei, said,

“On the demand side, while we observe softness in consumer end market segments, other end market segments such as data centres and automotive-related remain steady. And we are able to reallocate our capacity to support these areas. Despite the ongoing inventory correction, our customers’ demand continues to exceed our ability to supply. We expect our capacity to remain tight throughout 2022 and our full-year growth to be mid-30% in U.S. dollar terms.”

Exhibit 5: Valuations and Potential Upside of some of the Key Chip Players