【Investment Talk】Semiconductors are in dire shape! TSMC ANNOUNCES RESULTS AGAIN! What to look out for?

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Last night (July 17), the semiconductor sector in the US stocks performed badly,$ASML Holding (ASML.US)$、$Super Micro Computer (SMCI.US)$、$Qualcomm (QCOM.US)$、$NVIDIA (NVDA.US)$、$Taiwan Semiconductor (TSM.US)$Both fell heavily, falling between about 8% and 12%. With this in mind, TSMC today (before the July 18 close), what kind of chemical reaction do you think will lead to?

In fact, regardless of the short-term trend, from the perspective of long-term investment, it is necessary to return to the analysis of the fundamentals. Bull sir is here today to take a look at TSMC Q1 results and recent fundamentals, and then give Q2 results a key focus.

Semiconductor chip industry, known as the pearl of modern technology. while$Taiwan Semiconductor (TSM.US)$, is one of the key enterprises in the chip industry chain.

As the leader of the global wafer broker, TSMC's performance has also fluctuated with the cycle of the global chip industry, and the company's stock price has also fluctuated enormously in recent years. Since May, demand for high-end mobile chips has been boosted by Apple's price cuts, and on top of the ongoing heat in demand for data centers, TSMC's share price has hit a new high with a market capitalization near $1 trillion.

TSMC announces its results today. What should I view the results? And how to determine the position of its performance cycle? We focus on these metrics: revenue growth and gross margin, revenue structure, capital expenditure and cash flow.

1. Revenue growth and gross margin

For industries with a cyclical nature, changes in revenue growth, as well as changes in profitability, are important references for determining the direction of cyclical operations. When revenue growth continues to accelerate and profitability indicators such as gross margins continue to increase, it is essentially when the cyclical outlook is higher, and vice versa.

From the point of view of revenue growth, we see TSMC's revenue decline for three consecutive quarters, finally falling in Q3 2023, growing by 10.2%, continuing to rebound in 2023Q4, growing 14.4% YoY. In 2024Q1, TSMC had revenues of NT$592.64 billion, down 5.3% YoY, but the trend was reversed. However, compared to the same period last year, TSMC's 2024Q1 revenue grew by approximately 16.5% year over year.

TSMC calculates revenue by product shipment volume and price. In Q1 2024, TSMC's revenue declined, mainly due to lower product prices. In the quarter, as Apple's mobile phone sales fell sharply, resulting in a significant drop in demand for TSMC's highest-priced 3nm chip replacement business, resulting in a drop in overall prices.

However, Apple's sales rebound strongly in the second quarter, and Apple's new machines will integrate AI capabilities, and market expectations for sales of Apple's next-generation models have also strengthened the market's sales expectations for Apple's next-generation models. TSMC's average sales price may be boosted, stimulating future revenue growth.

In terms of gross margin, TSMC's Q1 2024 gross margin remained low at approximately 53.1%. This may be due to the impact of high depreciation expense driven by 3nm mass production.

Overall, TSMC's improved revenue growth may indicate that industry demand is heating up, but the pace of growth remains unstable.While TSMC's gross margin level remains at a lower position, due to higher depreciation costs, but more so because demand explosiveness remains insufficient and has failed to drive profitability. We can then continue to observe revenue and gross margin conditions to determine its cyclical warming.

2. Income structure

From an application perspective, TSMC's revenue structure is dominated by smartphones and high-performance computing, both of which account for around 80% of the company's revenue.

In Q3-Q4 2023, mobile phone revenue declined for two consecutive quarters, rebounding sharply from 33% in the second quarter to 43%, to some extent showing a warming in demand in the mobile phone market.

However, in 2024Q1, TSMC mobile phone revenue declined in proportion as Apple phone sales fell. On the contrary, TSMC's high-performance computing division's revenue share hit a new high in recent quarters in 2024Q1, benefiting from the impact of data center and AI demand.

Subsequently, we can continue to observe the demand cycle changes in the mobile phone market and the persistence of the data center demand landscape, and the resulting impact on TSMC results.

From the point of view of chip processing technology, TSMC's revenue can be divided into 7nm and above 7nm. Generally speaking, the lower the processing of chips and the more advanced the level of technology, TSMC is the world's most advanced wafer fabricator, with most of its revenue coming from relatively advanced processes at 7nm and below.

In recent quarters, TSMC's revenue below 7nm was dominated by 5nm and 7nm, and gradually switched from 7nm processes to more advanced 5nm processes. By Q3 2023, TSMC 3nm technology began formal mass production, which also contributed about 6% of overall revenue, further increasing to 15% in Q4 2023 But in 2024Q1 it fell to 9% due to Apple's sales decline.

In the coming quarters, with sales growth driven by Apple's new price reduction promotion, improved sales expectations for new machines, and the introduction of the latest high-end models in the Android industry chain, TSMC's 3nm technology segment may be expected to drive revenue growth further.

3. Capital expenditure and cash flow

TSMC is the leader of the global wafer broker and a company whose market value is second only to that of the entire chip industry chain. Despite the industry's outstanding position, it also has its problems that it has to stay ahead of the technology.

The chip replacement industry, driven by Moore's Law, is constantly moving towards more advanced process technologies. Once TSMC breaks loose, it is a backwater boat, never retreating, being outpaced by competitors such as Samsung Electronics in minutes.

Developing new technological processes, in addition to requiring R&D expenses, but also supporting new production line capacity, means that TSMC's capital expenditure remains relatively high.

We see that from 2006-2023, the cumulative capital expenditure of TSMC amounted to NT$6.7 trillion, while the net profit for the same period was about 6 trillion, with capital expenditure even more than net profit.Because of this, the cumulative free cash flow of TSMC amounted to about 3.3 trillion during the period, representing only about 60% of total net profit.

IN MANY VALUATION MODELS, FREE CASH FLOW IS A VERY IMPORTANT VALUATION INDICATOR. TSMC'S FREE CASH FLOW IS FAR BELOW NET PROFIT AND NEGATIVELY AFFECTS ITS VALUATION, THUS AFFECTING LONG-TERM SHARE PRICE PERFORMANCE.

So with this indicator of capital expenditure, from a short-term point of view, we can observe the attitude of the company itself to the industry cycle. In general, companies may reduce capital expenditures if they determine a downward cycle, and if the judgment cycle continues to go up, they may continue to increase capital expenditures.

In recent quarters, TSMC's capital expenditure has continued to decline, but in 2024Q1, its capital expenditure has rebounded, and we can continue to observe changes in the company's capital expenditure.

In the long run, TSMC's capital expenditure trends may be linked to technological trends in wafer manufacturing. If future Moore's law fails completely, chip processes lose room for improvement, and TSMC's capital expenditure growth may slow down.

But by the time when TSMC enters, while competitors are slowly catching up, the competitive pressure intensifies, and while TSMC's cash flow has improved, gross margins may also fall, and then there will be another logic of competition and valuation.

Writing here, you may have some new insights into how to read TSMC's results.It's worth mentioning that every time many star companies post results, it can mean a tough trading opportunity for different types of investors.

For example, if an investor feels that a company's recent performance will release some positive signals and favor short-term stock prices by interpreting past performance and incorporating recent progress, investors may consider doing more, and doing more could be to consider buying positive stocks, or consider buying bullish options, etc.

Conversely, if investors feel that the latest performance of a company will be less than optimistic and put pressure on short-term stock prices, investors may consider going blank, or consider buying bearish options, etc.

Of course, if investors feel that the direction of a company's performance is not very clear, but the stock price may fluctuate significantly upwards or downwards after the results are released, then investors may consider doing more of its share price volatility and consider buying both bullish and bearish cross strategies to gain a foothold In Opportunity.

Finally, summarize

TSMC's revenue rose for two consecutive quarters, while gross profit continued to decline. Further warming in the cycle remains to be seen.

In terms of revenue structure, the warming of the mobile market could bring positive changes to TSMC's revenue. Mass production of TSMC 3nm technology may also further drive TSMC revenue growth.

Capital expenditure at TSMC significantly impacts free cash flow, thereby impacting valuation. We can observe changes in capital expenditure from both short and long term perspectives.

Each time a company publishes results, it may bring potential trading opportunities. Investors can consider the right types of trades based on their individual risk tolerance.

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