Q3 2024 Summary
Published Feb 18, 2025, 5:23 PM UTC- Robust and Growing AI Demand: TSMC's CEO stated that the AI demand is "just the beginning" and will continue for many years. One of their key customers mentioned that the demand is "insane". This indicates a strong and sustained growth in AI-related chip demand, benefiting TSMC's advanced technologies.
- Significant Capacity Expansion Amid Unprecedented Demand: Despite increasing CoWoS capacity by more than 2x this year compared with last year and planning to double again, TSMC's customer demand far exceeds their ability to supply. This suggests strong market demand and potential for substantial revenue growth as TSMC works to meet customer requirements.
- Healthy Outlook for PC and Smartphone Segments Due to AI Integration: While unit growth in PCs and smartphones is in the low single digits, the silicon area is increasing faster because of more AI content in chips. TSMC expects these businesses to gradually increase and be healthy in the next few years driven by AI-related applications.
- Gross margin dilution and rising costs: TSMC's overseas expansions, particularly in the U.S. and Japan, are expected to dilute gross margins by 2% to 3% each year over the next several years due to higher operational costs and lower initial profitability of new fabs. Additionally, rising electricity costs in Taiwan are expected to impact gross margin by at least 1%, with electricity prices doubling over the last few years.
- Capacity constraints in advanced packaging (CoWoS): TSMC is facing significant challenges in scaling its advanced packaging (CoWoS) capacity to meet the extremely robust AI-related demand. Despite plans to double CoWoS capacity this year and again next year, demand still far exceeds supply, potentially limiting TSMC's ability to fully capitalize on the AI growth opportunity and risking customer dissatisfaction or loss to competitors.
- Potential regulatory and antitrust risks: Concerns about TSMC's significant market share and dominance in the foundry market could lead to regulatory scrutiny and antitrust risks. As TSMC continues to expand its Foundry 2.0 model, including wafer manufacturing and advanced packaging, its market share could be perceived as monopolistic, which may constrain its pricing strategies and impact its relationships with customers and regulators.
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Sustained AI Demand Growth and Integration | Emphasized across Q2 2024, Q1 2024, and Q4 2023 as a structural and long‑term growth driver for both external AI processors and internal operations | Reiterated in Q3 2024 with deep customer engagement, a forecast to more than triple AI server processor revenue, and strong integration in fab and R&D operations | Consistently positive with increased quantitative backing |
Capacity Constraints in Advanced Packaging and Leading‑Edge Production | Described in Q2 2024, Q1 2024, and Q4 2023 as severe, prompting doubling of CoWoS capacity and heavy reliance on OSAT partners | Q3 2024 continues to report tight supply despite capacity doubling efforts, with robust demand for 3‑nm, 5‑nm, and 2‑nm nodes | Persistent challenge despite capacity expansions |
Advancements in Advanced Process Technologies (2nm, 3nm, etc.) | Consistently highlighted in Q1 2024, Q2 2024, and Q4 2023 with strong customer interest and strategic progress in 2‑nm and ramp-up of 3‑nm technologies | In Q3 2024, strong demand is maintained with enhanced capacity preparations for 2‑nm and steady performance from 3‑nm and 5‑nm nodes | Sustained innovation with increasing customer engagement |
Gross Margin Pressures and Rising Operational Costs | Noted in Q1 2024, Q2 2024, and Q4 2023 due to higher electricity costs, depreciation, and tool conversion for advanced nodes affecting margins | Q3 2024 again reports margin dilution driven by overseas expansion, rising electricity rates, and operational cost pressures | Consistently negative as cost pressures persist |
Regulatory, Antitrust, and Geopolitical Risks | Addressed in Q4 2023 and Q1 2024 with mentions of macro and geopolitical uncertainties; Q2 2024 focused on geopolitical risks | In Q3 2024, antitrust concerns are downplayed while a diversified, global manufacturing footprint is highlighted as a buffer against geopolitical risks | Neutral sentiment with strategic mitigation measures |
Growth in High‑Performance Computing (HPC) and AI Data Center Demand | Across Q1 2024, Q2 2024, and Q4 2023, HPC and AI data center demand were noted as strong growth areas with increasing revenue contributions | Q3 2024 reports an 11% quarter‑over‑quarter increase in HPC revenue and forecasts that revenue from AI server processors will more than triple, reinforcing robust market demand | Continued robust growth with an improved trajectory |
Overcapacity Concerns in Mature Nodes | Discussed in Q1 2024 and Q4 2023 as potential issues mitigated through specialty technology solutions, while Q2 2024 was silent on the topic | Q3 2024 did not explicitly mention mature node overcapacity, suggesting a strategic de‑prioritization as focus shifts to advanced nodes | Declining emphasis as the focus shifts to advanced technologies |
Decline in Automotive Semiconductor Demand | Q1 2024 indicated an inventory correction and a downturn in automotive outlook, whereas Q4 2023 showed growth in this segment | Q3 2024 shows a positive trend with automotive revenue increasing by 6% and contributing 5% to total revenue | Reversal from earlier declines toward a recovery |
Investment and CapEx Challenges in Overseas Expansion | Extensively discussed in Q1 2024, Q2 2024, and Q4 2023 regarding high costs, government subsidy reliance, and complex capacity planning in locations like Arizona and Kumamoto | Q3 2024 reiterated the challenges of higher overseas fab costs and margin dilution from new international facilities, while leveraging technology leadership to remain competitive | Consistently challenging with cautious, strategic investments |
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AI Demand Sustainability
Q: Is the current AI demand real and sustainable, or could it be a bubble?
A: Management asserts that the AI demand is real and just the beginning of a long-term growth cycle. They have deep engagements with customers, including hyperscalers and AI innovators, and believe AI applications will continue to drive demand for many years. -
CapEx Plans Amid Strong Demand
Q: Will TSMC increase CapEx to meet strong AI demand in the coming years?
A: While CapEx has been stable in 2023 and 2024, management indicates that with the healthy growth expected next year, CapEx is likely to be higher in 2025 to capture future growth opportunities. They maintain a disciplined approach to capacity planning. -
Gross Margin Outlook
Q: How will TSMC's gross margins trend into 2025?
A: Gross margins are expected to be impacted by overseas fab expansion (2–3% dilution), increased electricity costs (impacting margins by at least 1%), preparation costs for advanced nodes like N2, and foreign exchange rate movements. However, improved utilization and reduced dilution from N3 ramp are positives. -
Long-Term Revenue Growth Guidance
Q: Has the long-term revenue growth guidance been updated given strong AI demand?
A: Management did not provide a new long-term CAGR but anticipates healthy growth in the next five years, driven by AI demand. They hope to grow faster but are not ready to share specific numbers. -
2-Nanometer Capacity and Chiplet Design
Q: How will chiplet designs affect 2-nanometer capacity plans?
A: Despite chiplet designs potentially reducing wafer area per chip, TSMC sees higher demand for 2-nanometer than anticipated. They are preparing more capacity for N2 than N3, with strong interest from customers. -
Advanced Packaging and CoWoS Capacity
Q: What is the outlook for advanced packaging revenue and CoWoS capacity expansion?
A: Advanced packaging is expected to grow faster than the corporate average over the next five years. CoWoS capacity is being increased significantly, with plans to more than double capacity, but demand still exceeds supply. Margins are improving and approaching corporate levels. -
Dividend Policy and Capital Allocation
Q: Will TSMC consider increasing cash dividends in the near future?
A: Management aims for a sustainable and steadily increasing dividend policy, aligning with free cash flow growth. Their primary focus remains on organic growth investments, with excess free cash flow being returned to shareholders. -
Antitrust Risk and Pricing Strategy
Q: How does TSMC address potential antitrust risks given its high margins and market position?
A: TSMC views customers and suppliers as partners and emphasizes mutual growth. They believe their market share (around 30% in the broader Foundry 2.0 market) does not constitute dominance leading to antitrust concerns. They focus on selling value rather than exerting bargaining power. -
Non-AI Demand Outlook
Q: What is the outlook for PC and mobile wafer demand into 2025?
A: PC and smartphone unit growth remains in the low single digits, but increasing silicon content due to AI applications leads to faster growth in wafer demand. Management expects healthy demand in the next few years. -
Taiwan Energy Challenges
Q: Are there energy challenges affecting TSMC's 2-nanometer fab expansions in Taiwan?
A: TSMC acknowledges the need for electricity, water, and land for fab expansions and works closely with the government. They have received assurances of sufficient support, including electricity supply, to meet their growth plans.