TSM’s 3nm Chip Price Hike: The Move That’s Shaking Up the AI Chip Market! 🚀

Taiwan Semiconductor (TSM) is seeing gains, approaching record highs following news of its planned price increase for 3-nanometer chips. The smaller the chip, the more powerful and efficient it becomes, driving up demand. TSM’s 5nm chips currently make up the bulk of its revenue, but 3nm products are expected to significantly boost future growth, particularly in the AI sector, driven by companies like NVIDIA and AMD. Despite this positive outlook, TSM’s gross margins are under pressure due to increased production costs of 3nm chips and the conversion of 5nm tools. To counteract this, TSM aims to raise prices, which is well-received by the market. The price hike is expected to help TSM manage costs better and maintain its long-term 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 targets, even as competitors like NVIDIA show strong financial performance.

Positive Market Reaction to Price Hikes

While price hikes can often garner positive responses due to potential revenue and margin boosts, TSM’s announcement is being particularly well-received for several reasons.

TSM anticipated that its overall business would grow stronger beginning in Q2, accelerating to form a more robust second half of the year compared to the first. Its 3nm products were expected to play a meaningful role in this optimistic outlook. AI was the primary driver, as chip designers from NVIDIA (NVDA) to Advanced Micro Devices (AMD) continue to seize the opportunity to pull ahead in the AI race. Although the technology accounted for only 9% of wafer revenues in Q1, TSM expected its revenue contribution to ramp up starting next quarter.

Impact on Gross Margins

However, as the revenue contribution from 3nm technologies increased, TSM’s gross margins were compressing. The company projected a 3-4 point hit to gross margins due to the uptick in 3nm revenues, which was 1 point worse than the dilution to Q1 gross margins. Additionally, to support 3nm capacity, TSM would be converting some 5nm tools, further diluting gross margins by an additional 1-2 points during the back half of the year.

As a result, TSM targeted gross margins of 51-53% for Q2, a 2-point drop at the low end from the 53.1% delivered in Q1. TSM did not issue FY24 margin guidance. Instead, management reiterated its long-term target of at least 53%, excluding foreign exchange impacts. The company also emphasized its commitment to controlling internal costs.

Market Applauds Planned Price Hikes

Given this context, TSM’s reportedly planned price hikes for 3nm products are being applauded by the market. As companies like NVDA and others boast massive leaps in revenue, supported by a seemingly unquenchable demand for AI, investors may have questioned whether TSM was charging enough given its need to manage costs to maintain its long-term gross margin goals. TSM commented in April that it was working on pricing as demand for its chips continued to swell.

For comparison, NVDA’s adjusted gross margins reached 78.9% in Q1 (May), up over 12 points year-over-year and 2 points sequentially. NVDA’s impressive margins can explain why it is reportedly open to TSM raising its prices — this would likely have little impact on NVDA’s profitability while helping to squeeze out some of its smaller competitors.

Insights:

1. TSM’s price hike for 3nm chips is strategic to balance cost and margin pressures.
2. The AI sector’s growth is a significant driver for TSM’s future revenue.
3. Market response indicates confidence in TSM’s ability to manage financial challenges.

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• Core Topics:
  • TSM’s price increase for 3nm chips
  • Revenue and margin implications
  • AI sector’s impact on demand
  • Gross margin challenges
  • Strategic cost management

The Action Plan:

1. Monitor AI Market Trends: Keep track of developments in AI and its impact on semiconductor demand.
2. Evaluate Pricing Strategies: Assess the effectiveness of TSM’s price hikes in maintaining margins.
3. Cost Management: Implement measures to control internal costs and optimize production efficiency.
4. Competitive Analysis: Compare TSM’s financial performance with competitors like NVIDIA to identify market positioning and profitability.

Blind Spot:

• Supply Chain Disruptions: Potential supply chain issues or geopolitical tensions could impact TSM’s production and revenue, which may not be fully accounted for in the current optimistic market outlook.

Taiwan Semiconductor (TSM) Technical Analysis

Price Trend: The stock price has been in an upward trend since early March 2024, consistently making higher highs and higher lows. The 50-day moving average (151.72) is above the 200-day moving average (119.96), indicating a strong bullish trend.

Volume: The volume has been relatively stable with occasional spikes, suggesting consistent trading activity. Notably, there was a volume spike in mid-May that coincided with a significant price increase.

Relative Strength IndexIn the world of technical analysis, the Relative Strength Index (RSI) stands as a cornerstone tool for traders seeking insights into market momentum. Developed by J. Welles Wilder ... More (RSI): The RSI is at 75.16, which is in the overbought territory (above 70). This suggests that the stock might be overvalued in the short term and could be due for a correction.

On Balance VolumeThe On Balance Volume indicator (OBV) is a technical analysis tool used to measure the flow of money into and out of a security over a specified period of time. It is a cumulative ... More (OBV): The OBV has been trending sideways, indicating that the volume on up days and down days is relatively balanced. This can sometimes precede a change in the price trend.

Stochastic RSIIn the realm of technical analysis, the Stochastic RSI (StochRSI) emerges as a powerful tool for traders seeking to navigate market dynamics with precision. Developed by Tushar S. ... More: The Stochastic RSI is at 1.000, which is also in the overbought territory. This further supports the potential for a short-term correction.

Average Directional IndexThe Average Directional Index (ADX) stands as a cornerstone indicator in the toolkit of technical traders, offering insights into the strength of market trends. Developed by Welles... More (ADX): The ADX is at 38.90, which is above 25, indicating a strong trend. The ADX does not indicate the direction of the trend, only its strength.

Chaikin OscillatorNamed after its creator Marc Chaikin, the Chaikin Oscillator stands as a formidable tool in the arsenal of technical analysts. This oscillator is designed to measure the accumulati... More: The Chaikin Oscillator is at 8.24M, showing a positive reading, which typically indicates that buying pressure is greater than selling pressure.

Time-Frame Signals:

• Short-term (3 months): Given the overbought RSI and Stochastic RSI, there may be a short-term correction or consolidation. However, the strong upward trend and positive indicators like the Chaikin Oscillator suggest that the stock will likely continue to perform well after a brief pullback. Hold.
• Medium-term (6 months): The bullish trend is well-established with strong support from the moving averages. The ADX indicates a strong trend, and the balanced OBV suggests no immediate reversal. Buy.
• Long-term (12 months): The overall trend is positive, supported by strong technical indicators and moving averages. Assuming no significant changes in market conditions or company fundamentals, the stock is likely to continue its upward trajectory. Buy.

Remember, past performance is not an indication of future results. Always conduct your own research and consider consulting with a financial advisor before making any investment decisions. 🧡

Strategic Implications and Market Enthusiasm

In conclusion, reports that TSM will hike the price of its most powerful chip for AI are generating significant enthusiasm. This strategic move could help offset the projected margin dilution and push TSM’s shares back toward all-time highs. The planned price increases demonstrate TSM’s proactive approach to maintaining its financial health while catering to the burgeoning demand for advanced AI technologies. As the AI race intensifies, TSM’s ability to balance cost management with innovative pricing strategies positions it well for sustained growth and market leadership.