TSMC Is On Fire. Just Beware of the Flames
(Bloomberg Opinion) -- Just three months after Taiwan Semiconductor Manufacturing Co. shocked investors with a record spending plan, the world’s most important chipmaker doubled down with an even bigger budget.
Apparently an eye-watering $25 billion to $28 billion in capital expenditure just wasn’t enough to satiate global demand, so the Hsinchu-based company raised it to $30 billion. The maker of chips for Apple Inc., Qualcomm Inc. and Nvidia Corp. backed up this aggressive view by raising its revenue growth outlook this year to 20% from 15%.
Driving that optimism is demand for high-performance computing and smartphones. These two categories require the latest semiconductors, which are a combination of powerful, small and energy-efficient. High-performance computing is a grab bag that includes artificial intelligence and machine learning, yet also games consoles, servers and telecommunications base stations. While the automotive industry has been loud in its complaints about chip shortages, TSMC got just 4% of its revenue from that sector last quarter, and sees the shortfall greatly reduced by next quarter.
Yet caution is warranted throughout TSMC’s earnings statement. That impressive top-line growth forecast definitely helps justify a bigger spending plan, but management also admits that capital intensity — a metric that charts spending against sales — will stay higher than average for a few years. With depreciation being the major contributor to costs, the end result will likely be downward pressure on gross margin. We’ve already seen this in the company’s second-quarter outlook announced Thursday, with predictions the figure may fall below 50% for the first time in almost two years.
Also worth watching is revenue contribution from its most advanced nodes. Most of TSMC’s spending will go toward boosting capacity for its leading-edge technology — which it defines as being 3, 5 and 7-nanometer nodes. Yet sales at the 5nm level, the most cutting-edge that it currently offers, actually dropped in the first quarter from the prior period. Admittedly, this was low season and driven by the drop-off in iPhone sales, but such data show just how niche some of its best product offerings truly are.
It’s one thing to be the global technology leader, but that’s not so helpful if the catalog of clients who want and need that bleeding edge gets shorter and shorter every year. TSMC is convinced that customers will continue lining up. Investors will need to be sure they share that confidence.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.
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