TSMC Set for 10%+ Revenue Drop This Quarter & Next Warn Analysts

Ramish Zafar
TSMC chairman attends a ceremony in Tainan, Taiwan for 3-nanometer chip manufacturing
TSMC's chairman Dr. Mark Liu in Tainan, Taiwan late last month as part of a beam lifting ceremony for a 3-nanometer manufacturing extension. Image: Liu Xuesheng/UDN

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The Taiwan Semiconductor Manufacturing Company (TSMC) is in for a rough earnings season, according to reports from investment banks. TSMC, the world's largest contract chip manufacturer, has had a difficult couple of quarters as a global economic slowdown and inventory correction in the aftermath of the coronavirus pandemic has reduced the company's orders right at a time when it is investing heavily into capacity expansion to produce leading edge semiconductors.

TSMC Will Face Revenue Slump During H1 2023 Warn Investment Banks

TSMC is set to report its earnings results for the fourth quarter of this year next week, and several investment banks are out with their thoughts on the matter. The consensus among UBS, Citigroup, JPMorgan and Goldman Sachs is that for the first two quarters of 2023, the Taiwanese firm will face a revenue drop. Later on, as TSMC ramps up 3-nanometer production and starts shipping the latest products, it will recover its growth rate in 2024.

According to Citigroup, for the first and second quarters of this year, TSMC's sequential revenue - or quarter on quarter - will drop by 14% and 9%, respectively. Adding on to this, it states that the fab's profit will drop by 5% and 15%. UBS has similar estimates, with the research firm outlining that for Q1 2023 and Q2 2023, TSMC's revenue will slump by 16% and 3% to 4% sequentially. Finally, JP Morgan is the most pessimistic among all, as not only does it expect a 12% revenue drop during 2023's first quarter but another similar drop in the next quarter.

TSMC's business, especially regarding the newer manufacturing technologies, is seasonal, as the fab starts to fulfill orders for its customers only when products are due for a launch. The first quarter of a calendar year is a slow one, as inventories across the board are adjusted, and the products shipped during the previous quarter make their way to the consumer.

TSMC's third quarter of 2022 earnings report revealed that while revenue contribution from older technologies fell, its latest 5-nanometer products grew. Image: TSMC

As far as the reasons behind the revenue drop go, a key factor is a drop in orders. UBS believes that for TSMC's 7-nanometer and 6-nanometer manufacturing processes - both of which are part of the same generation - the capacity utilization can drop to a painful 40%. For the newer 5-nanometer process, which was TSMC's leading-edge manufacturing recently, the utilization will drop to 80%, according to the firm. 5-nanometer was the bulwark for TSMC during its third-quarter revenue, as it maintained market performance even as older technologies witnessed drops in the revenue contribution percentage.

It, however, adds that for mature technologies, TSMC sees stable utilization compared to other foundries. Utilization is a crucial metric in the chip industry, as it determines the proportion of demand that the companies see compared to the demand for which they have already prepared.

Looking at the future, Morgan Stanley shares that while TSMC"s revenue will bottom out during the second quarter, demand for the company's N3E manufacturing process will pick up the mantle then. This will lead to 2024 operating revenue growing by 24% annually. This growth percentage will be higher, especially after this year's drops. UBS pegs 2023 annual revenue to remain flat, after penning a 3% growth previously. Goldman Sachs concurs with Mogan Stanley as it also believes that the fab's revenue will pick up during the second half of this year.

Moving towards price targets, JPMorgan, Goldman Sachs and UBS have set NT$650, NT600 and NT$690 price estimates for the Taiwanese fab. TSMC's shares closed at NT$458.50 earlier today in Taiwan and are down by nearly 28% over the past year. However, they are still higher than the sub NT$390 level that the shares were trading at during late October and early November, as Warren Buffet's decision to scoop up $6 billion of shares during 2022's third quarter propped them up from recent record lows.

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