Taiwan Semiconductor Manufacturing (TSM) Beats Q4 Expectations and Forecasts Robust Growth in FY24

Taiwan Semiconductor Manufacturing (TSM), the world’s leading contract chip manufacturer, recently reported its fourth-quarter earnings, surpassing expectations. In addition to beating earnings estimates, the company provided an optimistic outlook for FY24, signaling a healthy rebound for the semiconductor industry. This article delves into TSM’s impressive performance, its strategic focus on advanced chip technologies, and the potential impact on its customers, including NVIDIA (NVDA), Advanced Micro Devices (AMD), and Qualcomm (QCOM).

A Strong Finish to Q4

TSM’s fourth-quarter results exceeded expectations, instilling confidence in the semiconductor sector. The company reported earnings per shareEarnings per share (EPS) is a fundamental financial metric that provides valuable insights into a company's profitability. This widely used indicator helps investors and analysts g... More (EPS) that outperformed forecasts, setting a positive tone for the industry. This promising outcome is particularly significant as the semiconductor market emerges from a challenging period characterized by a deep inventory glut.

TSM’s Bullish FY24 Revenue Forecast

One of the standout highlights from TSM’s earnings report is its upbeat outlook for FY24. The company anticipates revenue growth in the low-to-mid 20% range, a forecast that bodes well for the broader semiconductor industry. This projection reflects a resurgence in demand for semiconductor chips, driven by various applications, including smartphones and high-performance computing.

The Role of Advanced Chip Technologies

TSM’s improving performance and optimistic forecast can be attributed, in part, to its investment in cutting-edge chip technologies. Notably, the company has ramped up production of its 3-nanometer (N3) chips, which play a pivotal role in powering smartphones and high-performance computing, including artificial intelligence (AI) applications.

In Q4, N3 chips accounted for 15% of TSM’s total wafer revenue, a significant leap from virtually zero in FY22. As the demand for AI-based technologies and applications continues to grow throughout 2024, TSM expects revenue generated from its N3 technology to more than triple this year, constituting a mid-teens percentage of the total revenue.

The Margin Challenge

While TSM’s expansion into advanced chip technologies presents substantial growth opportunities, there are challenges to overcome. As N3 chips become a more substantial part of the revenue mix, the company anticipates a short-term impact on gross margins. In FY24, TSM projects that N3 will dilute gross marginGross margin is a critical financial metric that plays a pivotal role in evaluating a company's financial health and profitability. It is a percentage that indicates how efficientl... More by 3-4 percentage points. However, the company maintains a long-term gross margin target of 53% or higher.

To mitigate the near-term margin challenges, TSM is banking on an improved utilization rate driven by robust demand, which should help offset the headwinds posed by N3 expansion.

Looking Ahead: 2-Nanometer Technology

TSM is also preparing for the future with its 2-nanometer (N2) technology development, progressing well and set for volume production in 2025. Encouragingly, the company has reported heightened customer interest in N2 compared to N3, spanning both smartphone and high-performance computing applications. This underscores the industry’s drive toward more advanced chip solutions.

Capital Expenditure and Construction Delays

Despite its expansion efforts, including the construction of two new facilities in Arizona, TSM expects capital expenditures to remain relatively flat year-over-year in FY24, ranging from $28 billion to $32 billion. A notable factor contributing to this expectation is a delay in the construction timeline for one of the Arizona facilities, with volume production now scheduled for 2027-2028, as opposed to the initial projection of 2026.

A Brighter Outlook for TSM and the Semiconductor Industry

In summary, TSM’s strong finish to Q4, coupled with its bullish revenue forecast for FY24, signals a robust recovery for the company and the semiconductor space at large. This resurgence is underpinned by a more balanced supply and demand environment and increasing demand for AI-based technologies.

While TSM acknowledges the presence of macroeconomic and geopolitical uncertainties that could impact market demand, the company maintains an optimistic outlook for FY24. As a key player in the semiconductor industry, TSM’s performance and growth trajectory are closely watched, and its positive outlook is expected to have a ripple effect throughout the sector.