Taiwan Semiconductor Manufacturing delivered a strong earnings report that beat top-line and bottom-line estimates. The company's Q4 revenue guide was also higher than analyst estimates. However, the chart is not looking good, and this may be a situation where technicals are providing a heads up that TSM has too much geopolitical risk for buyers to step in. We cover the earnings report below, and as a courtesy to Pro Members, we are relaying the technical setup we are tracking. Advanced Members will receive real-time trade alerts regarding any final decisions on this position.
TSM expects healthy growth in 2024. Management mentioned in the earnings call that they see early signs of demand stabilization in the PC and smartphone markets. Along with this, due to technological leadership, it can capture a significant portion of AI business.
Revenue & EPS
Revenue declined by (-14.6%) YoY and up 10.2% QoQ to $17.28 billion. Revenue came at the higher end of the guidance of $16.7 billion to $17.5 billion and beat the analysts estimate by 1.48%.
Wendell Huang, CFO of the company, said, “Our third quarter business was supported by the strong ramp of our industry-leading 3-nanometer technology and higher demand for 5-nanometer technologies, partially offset by customers’ ongoing inventory adjustment,”strong ramp of our industry-leading 3-nanometer technology and higher demand for 5-nanometer technologies, partially offset by customers’ ongoing inventory adjustment,” he further added, “Moving into fourth quarter 2023, we expect our business to be supported by the continued strong ramp of our 3-nanomenter technology, partially offset by customers’ continued inventory adjustment.”continued strong ramp of our 3-nanomenter technology, partially offset by customers’ continued inventory adjustment.”
Management guidance for the next quarter is $18.8 billion to $19.6 billion, representing a YoY decline of (-3.66%) at the mid-point, which came in about 5% higher than estimates, primarily due to the strong ramp up of 3-nanometer technology.
EPS came at $1.29 and beat estimates by 11.2%.
Margins
- Gross margin came in at 54.3% compared to 60.4% in the same period last year and 54.1% in Q2. This beat was management guidance of 51.5% to 53.5%. The sequential improvement of 20 basis points was due to a higher capacity utilization rate and more favourable foreign exchange rate, and was partially offset by the initial ramp-up of the 3-nanometer technology.
- Management guidance for gross margin next quarter is 51.5% to 53.5%
- The operating margin of 41.7% compared to 50.6% in the same period last year and was lower by 30 basis points QoQ.
- Net margin of 38.6% compared to 45.8% in the same period last year and 37.8% in Q2.
Cash Flow and Balance Sheet
Overall, cash flow is improving and returning to normal levels.
- Operating cash flow of $9.31 billion or 54% of revenue compared to $13.61 billion or 67% of revenue in Q3 of last year, yet is up from 35% of revenue in Q2.
- Free cash flow of $2.15 billion or 12% of revenue compares to a FCF margin last year of 24% of revenue, yet is a marked improvement from last quarter at (-17%) of revenue.
Capex was down (-18.9%) YoY to $7.1 billion. Management confirmed in the earnings call that capex will be $32 billion for 2023. In the last earnings call, they mentioned that due to the uncertainty in the business environment, capex would be at the lower end of their range of $32 billion to $36 billion.
Looking forward, the management expects capex to cool off in the next few years, which is a positive if revenue accelerates. Wendell Huang said in the earnings call. “Now in terms of CapEx, what we can see now is that we, in the past few years, have invested very heavily to capture the growth in the next few years. And as we begin to harvest those investments, we expect our — the increase of our CapEx to be leveling off in the next few years. That doesn't mean the dollar amount is going to reduce. But the capital intensity is expected to decline in the next few years.”have invested very heavily to capture the growth in the next few years. And as we begin to harvest those investments, we expect our — the increase of our CapEx to be leveling off in the next few years. That doesn't mean the dollar amount is going to reduce. But the capital intensity is expected to decline in the next few years.”
The company has cash and marketable securities of $48.06 billion and debt of $29.1 billion.
Key Metrics
The 3-nanometer process technology is seeing a strong ramp in the second half of the year supported by both HPC and smartphones. CEO Dr. C.C. Wei, said in the earnings call. “N3 is already involving production with good yield, and we are seeing a strong ramp in the second half of this year, supported by both HPC and smartphone applications. We reaffirm N3 will contribute a mid-single-digit percentage of our total wafer revenue in 2023, and we expect a much higher percentage in 2024 supported by robust demand for multiple customers.”with good yield, and we are seeing a strong ramp in the second half of this year, supported by both HPC and smartphone applications. We reaffirm N3 will contribute a mid-single-digit percentage of our total wafer revenue in 2023, and we expect a much higher percentage in 2024 supported by robust demand for multiple customers.”
- Smartphone grew by 33% QoQ compared to a decline of (9%) QoQ in Q2
- High-performance computing grew by 6% QoQ compared to a decline of (5%) QoQ in Q2
- IoT grew by 24% QoQ compared to a decline of (11%) QoQ in Q2
- Automotive declined by (24%) QoQ compared to a growth of 3% QoQ in Q2
- Digital Consumer Electronics declined by (1%) QoQ compared to an increase of 25% QoQ in Q2.
- Others declined by (2%) QoQ compared to a decline of (5%) QoQ in Q2
Conclusion
The signs of stabilization of demand in PC and smartphone markets, and the potential to capture the AI business due to technological leadership, lay a strong foundation for growth in 2024. However, the technical chart is at odds with this conclusion.
Technical Analysis
By Knox Ridley
TSM, like many stocks off the October low, has not been a vertical pattern. In fact, as you can see below, it has many overlaps, marked with large swings in both directions. The pattern into the June high best fits as a large degree corrective rally (B wave). In other words, the 2022 decline was the A wave down, 2023 was the B wave up, and the pattern requires one more down move to new lows before completing, which would be called the C wave.
What gives me caution is that C waves are always 5-wave patterns. Now, look at the shape of the pattern from the June high. It’s clearly 5 waves down. The other issue I have is that TSM has broken the major trend channel pointing up. This is rarely a good sign and further supports the above analysis. The retrace up is currently testing the lower end of the channel, and unable to break back in.
In conclusion, this bounce is likely a reasonable place to exit/trim. We will be look to much lower levels to build a long-term position in this company.
Royston Roche, Equity Analyst at the I/O Fund, contributed to this analysis.
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