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    Taiwan Semiconductor Manufacturing Co Ltd (TSM)

    Q4 2023 Summary

    Published Feb 18, 2025, 5:23 PM UTC
    Initial Price$87.18October 1, 2023
    Final Price$104.00December 31, 2023
    Price Change$16.82
    % Change+19.29%

    What went well

    • Strong Growth in High-Performance Computing (HPC) Segment: TSMC executives indicated that HPC will have the highest growth, actually much higher than the corporate average in 2024, driving the company's revenue growth. Other platforms are also expected to grow, although slower than the corporate average.
    • Confidence in Achieving Long-Term Gross Margin Targets: Despite short-term gross margin dilution due to factors like N3 ramp-up and N5 to N3 capacity conversion, TSMC is confident that a long-term gross margin of 53% and higher is achievable. Executives mentioned they are working on potentially returning to mid- to high-50s gross margins as utilization rates improve.
    • Maintaining Profitability Through Specialty Technologies at Mature Nodes: Addressing concerns about overcapacity in mature nodes, TSMC focuses on differentiated specialty technologies with customer commitments. This strategy allows them to maintain profitability around the corporate average for mature nodes, ensuring strong financial performance despite industry-wide capacity expansions.

    What went wrong

    • Overcapacity in Mature Nodes Could Lead to Industry-Wide Oversupply: TSMC acknowledged that there might be too much capacity being built for mature nodes, leading to valid concerns about overcapacity in the industry. This could potentially impact profitability in the mature node segment.
    • Slowing CapEx Growth and Future Investment Requirements May Impact Financials: TSMC's CapEx is leveling off, with expectations to maintain around 30% capital intensity over the next several years. However, future nodes like 2-nanometer may require increased investment, potentially affecting financial performance.
    • Geopolitical Uncertainties and Overseas Expansion Risks: There are uncertainties regarding TSMC's overseas expansion plans, including potential shifts in focus between U.S. and Japan fabs, and dependence on government incentives. Such geopolitical factors may introduce risks to TSMC's operations and capital allocation.

    Q&A Summary

    1. Gross Margin Outlook
      Q: Will gross margins return to mid-high 50s as utilization improves?
      A: Management is working towards achieving gross margins of 53% and higher once utilization rates improve. They believe margins can increase as capacity utilization returns to full, aiming for mid to high 50s.

    2. Revenue Growth Drivers
      Q: What's driving this year's revenue growth? HPC or smartphones?
      A: High-Performance Computing (HPC) will have the highest growth, much higher than the corporate average. Other platforms will grow but at a slower pace.

    3. AI Revenue Growth
      Q: Can TSMC increase AI revenue in coming years?
      A: TSMC expects AI revenue to grow with a 50% CAGR, anticipating high teens or higher percentage of total revenue from AI applications by 2027, due to strong demand in both front-end and back-end processes.

    4. CapEx and Capital Intensity
      Q: Is the flat CapEx a pause before increasing with 2nm?
      A: The rate of CapEx increase is slowing. Capital intensity is expected to remain around 30% in the next several years, down from over 50% in 2021.

    5. IDM Competitor Impact
      Q: How sustainable is IDM outsourcing growth to TSMC?
      A: TSMC has considered the risk of IDM competitors bringing production in-house and has taken a conservative approach in capacity planning, but specifics are strategic and not disclosed.

    6. Advanced Packaging Capacity
      Q: What's the outlook for advanced packaging capacity?
      A: Demand is very strong, exceeding capacity. TSMC is doubling CoWoS output this year and expects over 50% CAGR in advanced packaging in coming years, but constraints may continue through next year.

    7. Mature Node Overcapacity
      Q: Any concerns about mature node overcapacity impacting profitability?
      A: Overcapacity in mature nodes is a valid concern industry-wide, but TSMC focuses on specialty technologies with customer commitments, maintaining profitability around the corporate average.

    8. Technology Leadership Decisions
      Q: How confident is TSMC in technology choices like high-NA EUV?
      A: TSMC carefully evaluates new technologies, always making the right decisions to serve customers with the best technology at reasonable cost and maturity, maintaining leadership with all customers on 2nm except one.

    9. Geographic Expansion Plans
      Q: Is TSMC shifting overseas expansion focus to Japan over the U.S.?
      A: TSMC is evaluating expansion in both Japan and the U.S. The second fab in Japan is under serious evaluation for 7nm or 16/12nm technology. U.S. expansion continues with plans for the Arizona fab.

    10. Arizona Fab Customers
      Q: Will U.S. customers only want U.S.-made wafers from Arizona?
      A: The Arizona fab is for all customers, but the majority will be U.S. customers.

    11. Advanced Packaging Developments
      Q: Are customers shifting to CoWoS-L or CoWoS-R?
      A: TSMC is developing next-generation CoWoS solutions like CoWoS-L, working closely with customers and expanding capacity accordingly.

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