TSMC reported earnings yesterday, and the management team seemed very happy about things. Their numbers came in ahead of expectations, and their outlook seemed very positive. AI is very good for TSMC.
When companies report solid earnings it can leave sell side analysts in an odd position. They have the opportunity to ask questions, but with no obvious problems what can they ask about. The chief target on this call ended up being gross margins. To be clear, TSMC’s gross margins look very good, but the company continues to voice a degree of caution about them, which they largely attribute to dilution from the company’s overseas fabs in Japan and Arizona. Even here though, TSMC only expects 3%-5% dilution to margin from these plants, which for a company which just broke a $100 billion in revenue is not a major concern. We thought it interesting that the company broke down the causes of that dilution which they attributed to the relatively small size of the plants (small for TSMC, because those plants are still massive) and a lack of localization as TSMC’s suppliers have some extra costs operating away from home as well. These are not major problems, a far cry from the doomsayers of last year warning of the US being 20%-30% more expensive. Given that TSMC is charging its customers (e.g. Apple) a premium for US production, we think it is safe to say that TSMC’s global expansion is turning out well for them commercially.
Setting all that aside, the real headline of the earnings call was TSMC’s outlook for 2025, in particular the growth they are enjoying from AI. Their AI revenue tripled last year and they expect it to more than double this year. When pressed on this in the Q&A they tipped their hat a bit indicating that revenue growth could be even higher if they can bring enough capacity online. Wink. Wink.
The other big takeaway was they plan to spend $39 billion to $42 billion on capex this year, which sent the tool makers stocks much higher. This amount is higher than most people were expecting, and is in absolute terms a massive number. They are spending most of this on advanced process nodes with their N2 node coming next year and A16 beginning to take shape. They are also spending 10%-20% of that capex on packaging, which is a small share given that packaging is probably their biggest capacity bottleneck, but is still $4 billion – $8 billion, which is probably more than the traditional packaging companies combined.
Beyond this the company reverted to their standard highly conservative tone. Demand elsewhere is fine, PCs and smartphones do not seem to be surging. We caution that TSMC is at the fair end of the whip. When it comes to forecasting end market demand, they are very far removed, and are not good indicators. They also dropped a few other interesting bits of information. In particular they expect their silicon photonics products to ramp in a year to a year and a half. Most people read this as being aligned with Nvidia’s co-packaged optical networking products. This is less relevant to either company’s results, but should be a major warning to the networking segment. Also, for those playing from home, management pointed out that their silicon on insulator (SOI) line is still largely going to AI uses and has not been taken up by smartphone or PC makers yet. (We know there is a small camp of readers who have been waiting for this for a long time, and unfortunately you will have to keep waiting.) Finally, TSMC management again changed their tone on Intel. Two quarters ago, the two companies threw barbs at each other, last quarter TSMC was notably neutral in their commentary, but now the two companies “are true partners”. We will leave it to you to guess what brought about that change.
That all being said, if we had to pull one concern out of this call it was the company’s growing reliance on AI. Admittedly, they are doing great business everywhere, but that AI line just keeps growing, and TSMC is spending heavily against it. Someday, if (when) spending on AI stops to catch its breath, TSMC will feel the hit.
But for now, that day remains far away.