TSMC released its September monthly revenue, which grew 39.6% YoY and 0.4% MoM to NT$251.87 billion. The third quarter revenue grew 39% YoY to NT$759.69 billion, beating the LSEG estimates of NT$750.36 billion.
In US dollar terms, Q3 revenue grew by 36.2% YoY to $23.53 billion using the average exchange rate of $1=NT$32.28. We will get the official USD figures when the company releases its full results on October 17th. The company handsomely beat the upper end of the guidance of $22.4 billion to $23.2 billion.
The strong September results suggest surging demand for AI chips and with more details on full quarter performance coming this week. Due to its technological leadership, the company has over 90% market share in the manufacturing of advanced AI chips. TSMC's customer base includes leading companies like Apple, Nvidia, AMD, Qualcomm, Marvell, and Intel.
TSMC is the leading global foundry in terms of revenue. It has a market share of 62.3% in Q2 2024. Samsung ranks a distant second with a market share of 11.5% in Q2 2024. WSJ reported TSMC’s global foundry revenue share to hit about 64% in 2024, up from 51% in 2019 and Samsung’s share to drop to 10% from 16% in 2019.
Revenue
Strong revenue growth is expected in the coming quarters due to the robust demand for AI and smartphone chips. Revenue estimates have gone up over the past few quarters, 4.7 points for the current quarter and estimates have risen 7.6 points for Q1 of next year indicating analysts’ confidence in the company’s ability to maintain growth.
- Management’s guide for the third quarter is between $22.4 billion and $23.2 billion. This represents year-over-year growth of 31.9% at the midpoint. Based on the monthly TWD figures, Q3 revenue grew by 36.2% YoY to $23.53 billion using the average exchange rate of $1= NT$32.28. We will get the official USD figures when the company releases its full results on October 17th.
- Q2 revenue grew by 32.8% YoY and 10.3% QoQ to $20.82 billion, primarily driven by strong AI demand and partially offset by smartphone seasonality. Q2 reported a remarkable 19.9% acceleration from 12.9% growth in Q1.
- During the Q2 earnings call, management increased full-year 2024 revenue guidance from low to mid-20% to slightly above mid-20% in US dollar terms as strong AI and high-end smartphone demand will lead to an increased capacity utilization for the 3-nanometer and 5-nanometer process technologies in the second half of the year.
Margins
While many companies struggle with rising costs, TSMC has successfully navigated these challenges by controlling costs and negotiating better prices with its customers. Due to reducing costs during a growth phase, referred to as “economies of scale,” and its leadership position in the foundry industry, the company has been able to report strong profitability.
According to DigiTimes, TSMC has notified its clients that prices for its 3-nanometer and 5-nanometer process products will increase by 3 to 8% in 2025. In the last earnings call, management hinted that prices will increase due to cost escalation.
- Management has guided Q3 gross margin to increase 1.3 percentage points sequentially to 54.5% at the mid-point due to better capacity utilization, cost improvements, and productivity gains compared to 54.3% in Q3 last year. The margin is expected to be partially offset by the N3 ramp, N5 to N3 tool conversion costs, and higher electricity prices in Taiwan. Electricity prices in Taiwan increased by 17% last year and another 25% in April this year. Management is confident of achieving a long-term gross margin of 53% and higher.
- Operating margins are expanding, helped by operating leverage. Management guide for Q3 is 43.5% at the midpoint compared to 41.7% in Q3 2023.
- Net income was $7.66 billion or 36.8% of revenue which is lower than usual. This margin trends in the high 30% range and into the 40% range. Return on equity was 26.7% compared to 23.2% in the same period last year.
EPS
EPS is projected to rise significantly. Analysts expect Q3 GAAP EPS to grow 36.4% YoY to $1.76. For next quarter, EPS is expected to grow 34.7% YoY to $1.94 in Q4.
Compare this to Q2 GAAP EPS of $1.48, up 29.8% YoY, which beat estimates by 4.2% due to better capacity utilization, cost improvement and operating leverage. More importantly, analysts expect Q3 EPS to grow 18.9% sequentially.
- Analysts expect 2024 GAAP EPS to grow 26.4% YoY to $6.55.
- For FY2025, they expect GAAP EPS to grow 29.9% YoY to $8.51.
Cash Flows and Balance Sheet
The company’s financial stability is evident due to its strong operating cash flows, which have more than doubled in Q2. The foundry industry is capital-intensive and this is why you will notice a wide difference between operating cash flows and free cash flows for the company.
- Operating cash flow was $11.68 billion or 56.1% of revenue compared to 35% of revenue in the same period last year and 73.6% in Q1.
- Free cash flow was $5.32 billion or 25.5% of revenue compared to (-17%) of revenue in the same period last year and 43% in Q1. The company had negative free cash flows last year due to the income tax payment of $3.85 billion.
- Management expects strong AI demand to continue and raised the midpoint of the capex for 2024 to $31 billion from the previous $30 billion, up 1.8% YoY. About 70% to 80% of the capex will be allocated to the advanced process technologies.
- According to a report from Economic Daily News, Institutional Investors expect the capex to remain within the updated guide for this year. They also expect management to announce an increase in capex for next year during the January results due to the expected strong demand for 2 nm process technology.
- Cash and marketable securities were $63.05 billion and debt of $30.4 billion compared to $60 billion and $30.25 billion in Q1. The company paid $2.8 billion in dividends in Q2.
Revenue by Platform
As the leading foundry for AI accelerators, TSMC is riding the enormous wave of demand from Big Tech. The chipmaker’s high-performance computing (HPC) revenues rose 28% QoQ to $10.8 billion and accounted for 52% of Q2 revenue, up from 46% of revenue in Q1. The HPC segment is above the 50% mark for the first time.
We can also notice in the below chart that the HPC revenue (which are mainly AI-related) reached a record $10.8 billion in Q2.
Smartphone revenues declined (-1%) QoQ due to seasonality and accounted for 33% of revenue compared to 38% of revenue in Q1. In the Q2 earnings call, management mentioned that they are witnessing strong AI and high-end smartphone-related demand in Q3. We will get the exact mix this week.
Internet of Things revenue grew by 6% sequentially and accounted for 6% of revenue.
Automotive revenue increased 5% sequentially and accounted for 5% of revenue. Digital Consumer Electronics increased 20% sequentially accounting for 2% of revenue. Other revenue increased 5% and accounted for 2% of revenue.
Revenue by Technology
The Advanced nodes are defined as 7-nanometer and below. We discussed in our editorial on the advanced nodes and AI-related revenue reaching fresh records. Most of the AI chips produced by the company utilize 5-nanometer and 4-nanometer process technology. 3-nanometer revenue is expected to triple this year and Apple usually gets the preference for the most advanced node in production. Volume production for 2-nanometer is expected in 2025 and should have a meaningful revenue contribution in the first half of 2026.
- In Q2 2024, 3-nanometer process technology contributed 15% of wafer revenue, while 5-nanometer and 7-nanometer accounted for 35% and 17%, respectively.
- In Q1 2024, 3-nanometer process technology contributed 9% of wafer revenue, while 5-nanometer and 7-nanometer accounted for 37% and 19%, respectively.
Advanced Packaging
The AI wave has also boosted the company’s advanced packaging business, particularly Chip-on-wafer-on-substrate (CoWoS). Morgan Stanley expects CoWoS capacity to reach 80,000 to 90,000 wafers per month by the end of 2025, up from a prior estimate of 70,000. The 2025 production capacity would suggest an over 430% increase from 15,000 at the end of 2023.
Management said in the Q2 earnings call Q&A that supply is expected to continue to be tight next year. They also mentioned that they are working with OSAT (Outsourced Semiconductor Assembly and Test) partners to increase production capacity.
Valuation
The company trades at a P/E ratio of 34.4 and a forward P/E ratio of 29.1. The P/S ratio is 13 and a forward P/S ratio of 11.4. In the last five years, the P/E ratio peaked at 41.8 in February 2021 and hit a low of 10.3 in November 2022. The stock is now trading above its five-year average P/E ratio of 24.1.
Conclusion
Due to technological leadership, TSMC can capture a significant portion of AI business and is the common denominator to the biggest AI winners as it supplies to Nvidia, Apple, AMD, Marvell, and Qualcomm. The company is negotiating better prices with its customers, is making cost improvements, and is maintaining strong margins and cash flows. Since TSMC generates strong cash flows, it has the scale to invest for future growth, and barriers of entry are high as the foundry industry is capital-intensive. We look forward to adding this stock to our portfolio in the coming months and will provide the play-by-play for our entries and adds to Essentials Members.
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Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.
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