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TSMC Points to More Strength in the Cloud

TSMC, the world’s largest semiconductor firm, has reported excellent Q3 results with EPS at $12.41bn – $0.90 ahead of estimates. As a result, expectations for Q4 have also been raised with revenues expected to increase from a predicted $12.11bn to $12.4bn – $12.7bn.

This marks a strong end to 2020 for TSMC with 30% year-on-year growth predicted for the year as a whole. The question for investors is, what’s driving this performance and can it be sustained?

According to TSMC’s quarterly report, actual and expected growth is based on strong performance in its smartphone, high-performance computing (HPC) and internet-of-things (IoT) segments. In spite of fears among some analysts of a reduction in smartphone demand, TSMC counts Apple among its clients. As a result, the firm appears to be a beneficiary of consolidated sales among the world’s top five or six smartphone vendors.

This is borne out by Apple’s recent five-month lockdown of TSMC’s 5nm production line to manufacture the chips powering the next generation of Apple hardware. No doubt this contributed to TSMC’s third quarter success. Success that the semiconductor manufacturer is happy to forecast into Q4 driven by 5G smartphone launches.

However, one area TSMC refused to be drawn on was how much of their performance has been driven by supply chain instability fears relating to the US/China trade war. Keen to avoid Huawei’s fate, Chinese smartphone manufacturers are shifting supply away from the US and back to China. It’s clear this has boosted TSMC’s output but, without insight into their smartphone customers’ plans, it’s difficult for TSMC to establish, and therefore be open about, the exact degree of stockpiling taking place. The implications of this for TSMC’s performance into 2021 remains to be seen.

With so much uncertainty, the only reliable take-home message from TSMC’s numbers is that demand in the cloud remains very strong.

As the pandemic accelerates into winter, the work and school-from-home trend continues boosting performance among on-demand cloud-computing platform providers. This aligns with TSMC’s focus on building out its 7nm capacity to serve its biggest client, Amazon Web Services, who are set for a strong Q4 2020. This could provide TSMC with an opportunity to ride AWS’ coat tails to excellent revenue growth through to early 2021.

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