TSMC’s Q1 Net Profit Doubles as Demand for Silicon Remains Strong

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Despite the fact that the first quarter of the year was defined by the outbreak of Covid-19, and China's economy stalling with the rest of the world's falling closely behind, Taiwan Semiconductor Manufacturing Company (TSMC) TPE:2330 reported today that its profit for the January - March period had nearly doubled hitting $3.89 billion, up 90.6% from the same time last year.

According to analyst projections, TSMC was projected to bring in $3.5 billion in profit. The company also reported that its revenue had increased by nearly 45% to $10.31 billion beating forecasts of $10.2 billion. For the upcoming April - June quarter, TSMC predicts revenue will be stable coming in at $10.3 to $10.4 billion.

TSMC, Samsung Rumored To Hike Chip Prices By As Much As 20%

All of this follows a recent report that says Taiwan finished 2019 as the world's top semiconductor equipment manufacturer. These companies would supply the likes of TSMC, and others, with the equipment to run their fabs. In late 2019, TSMC announced an aggressive expansion of its capital expenditures to the tune of $14-15 billion in order to build up the capacity of its 5nm-based facilities. Executives, however, revised this figure to be $15 billion to $16 billion for capital spending in 2020, up from last year’s $14.9 billion.

Separately, reports came through this week that Huawei's HiSilicon division had placed a large order with China's Semiconductor Manufacturing International (SMIC) instead of TSMC for silicon for its Kirkin 710 handsets. However, for Huawei, this would be a technical downgrade as SMIC isn't capable of 12nm FinFET node instead it would need to be made on the 14nm process. Rumblings that the U.S. government would block TSMC from dealing with Huawei likely expedited the decision. Huawei accounts for approximately 10% of TSMC's business.

Macroeconomic Headwinds for TSMC

Although TSMC sees a solid revenue stream in the coming quarter, later on in the year things are likely to change for the company. According to the U.S. Labor Department, 6.648 million people in the U.S. filed for initial unemployment benefits in the week that ended on the 28th of March 2020. In other economies things aren't that much better: Canada reported 3.1 million job losses during this period, the UK reported 2 million newly unemployed, and China's unemployment hit record numbers with 200 million people looking for work.

This is going to be an immense structural problem for TSMC. Virtually every economy in the world has staggering unemployment numbers. These people aren't going to be able to purchase the next 5G phone; it will be a bloodbath for consumer electronics.

According to 13F filings that have trickled in as the new quarter kicked off, funds in the U.S. are not changing their opinion on the company's ADR. There's a 0.5% uptick in new positions being staked out as funds approach the remaining three quarters with caution, knowing that TSMC and other firms in the sector will face tough macroeconomic headwinds.