TSMC has a $40 billion vaccine against inflation

Searing inflation and a wave of interest rate hikes is putting global economies on a path to recession. And yet the world’s largest custom chipmaker just raised its full-year revenue guidance after posting another quarter of record profit. It’s not crazy to think Taiwan Semiconductor Manufacturing Co. will hit these bullish targets.
Second-quarter net income of NT$237 billion ($8 billion) was again above expectations. Crucially, gross margin of 59.1% is a level not seen in 25 years and well beyond guidance and analyst estimates. It’s against this backdrop that the Hsinchu-based company said that it expects revenue to climb by a mid-30s percentage this year, just three months after saying it would hit or exceed original guidance for mid-to-high 20%.
Ultimately, this stronger outlook translates into as much as $5 billion in extra revenue.
Management is not blind to the global economic troubles playing out right now. The US consumer price index hit 9.1%, the largest gain in 41 years, while central banks from Chile to Canada are rushing to raise interest rates.
Chief Executive Officer C.C. Wei outlined for investors how escalating prices will raise the company’s own costs and hurt profit margins, while the broader slowdown is going to force customers to cut inventories, which then means lower orders to TSMC. That impact could last well into next year, he said.
Problems with equipment supply will also have an effect. Struggles to make and ship components, exacerbated by lockdowns in China, have made it difficult for companies like ASML Holding NV to provide the sophisticated tools chipmakers need. That will force TSMC to take late delivery on some machinery, trimming this year’s spending to the lower end of its previous $40 billion to $44 billion capex budget. We’re also seeing the end of the smartphone boom, a sector that has underpinned TSMC’s growth for more than a decade. “Despite ongoing inventory adjustments and uncertainties, the structural demand remains firm,” Wei said.
TSMC’s thesis, backed up by higher prices to its customers and chip factories that are running at maximum capacity, is that the need for ever more processing power is neither slowing nor short-term. While smartphone models come and go in annual cycles (or faster), companies which need high-performance computing are purchasing servers and semiconductors that they expect to deploy for many years.
Artificial intelligence is being used from e-commerce websites to electric vehicles and requires huge amounts of information as well as computational capacity. Faster 5G communications networks allow more data to flow. These all require beefier chips, and TSMC is one of the few companies that can supply them. And while smartphone shipments are declining — down 3.5% last year, according to Bloomberg Intelligence — the number of chips per device is climbing, and those components are becoming more powerful.
Put together, TSMC finds itself in the position of being somewhat immune to forces that are likely to see economies decline, unemployment increase, and profits shrink. Global equities markets have already priced in those changes.
—Bloomberg