TSMC's Q4 earnings report showcases how the semiconductor industry has pretty much become a winner-takes-all market, not just on the chip designing front but also on the fabrication front.
While you have many companies trying (yet not even coming close) to take Nvidia's crown as the biggest AI chip manufacturer, the polarity in performance of TSMC and other contract chip manufacturers such as Intel & Samsung is even starker, given that Samsung has been struggling to advance its chip making technology to smaller nodes and more sophisticated packaging and Intel is so far behind that they themselves outsource the manufacturing of their most advanced chip designs to TSMC, all while claiming to one day become a major competitor of theirs.
Q4 2024 earnings summary :-
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Q1 2025 and full year guidance :-
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Key takeaways from the earnings report and analyst call :-
- The AI revolution is upon us and showing no signs of slowing down yet: 53% of TSMC's Q4 revenue came from their high performance computing segment (HPC), which includes all forms of AI chips such as GPUs and ASICs. This number has steadily increased from 43% of the total revenue mix back in Q4 2023.
On a YoY basis, the HPC segment delivered growth of 58%, and this is on top of a strong Q4 showing back in 2023. Further, the company does not see the pace of growth slowing down materially, given their expectations of a mid-40% CAGR for AI accelerators over five years, starting from 2024 and CEO C.C. Wei expecting AI chip revenue to double this year, after having tripled in 2024.
- 2025 Capex guidance is well above expectations: TSMC has a tendency of being cautious when it comes to investing heavily behind a specific technology, but once they see an adequate amount of demand, they go hard on capex. The 2025 capex guidance seems to be on similar lines, where they now have an adequate amount of demand flowing in for HPC chips which gives them confidence to invest heavily on specialty processes (2nm chips) and advanced packaging and masking (Co-Wos packaging).
- Geographical diversification is on track and progressing steadily: While there were some hiccups on this front for TSMC, things seemed to have evened out , with their Kumamoto plant in Japan having started production with "very good yield". Additionally, The first Fab in Arizona is on track to start mass production of 4nm chips in Q4 of this year, and the yield being generated from this plant during initial testing is comparable to those of their plants in Taiwan. The 2 other fabs in Arizona are currently being built out and are on track to start volume production as per the plans laid out.
Having said that, the company does expect a 2-3% gross margin dilution over the next 5 years, due to the ramp up of their non-domestic Fabs.
- The impact of tighter trade restrictions being introduced by the US should be manageable: The management does not expect the tighter set of restrictions currently being pushed by the outgoing Biden administration to have too big of an impact, given that they focus upon the prevention of AI related chips being exported to China - A line of business that was already quite severely curtailed.
The company believes that they should be able to continue to service non-AI customers in the industrial, automotive and crypto segments.
Overall, we believe that this was yet another strong showing by TSMC, with their outlook for 2025 and 2026 being equally bright.
Given the nature of TSMC's business and its positioning in the market we see its as a barometer for the overall tech industry and specifically AI, and to that we believe that the correct takeaway for now is that the music is set to continue playing, with no signs of it slowing down.
We expect TSMC's earnings report today, to favorably impact wafer equipment manufacturers; AI hardware suppliers such as networking equipment providers and industrial businesses playing an active role in datacenter build outs.
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