The TSMC juggernaut shows no signs of slowing

Last year, Taiwan’s TSMC stamped its mark on the global economy with record sales and unrivalled leadership over the world’s most advanced chips. It looks to be even more dominant in 2022, and is flexing its muscles accordingly.

Investors will be cheered by record earnings, which beat even the highest of analyst estimates, and a widening gross margin that comes despite ongoing inflationary pressures coupled with constraints in procuring equipment and materials. They’ll also be pleased that the revenue outlook for this quarter is well above expectations.

“Gross margin increased mainly due to cost improvement and value-selling efforts,” chief financial officer Wendell Huang told investors on Thursday, noting that a decline in the Taiwan dollar provided a major boost. Expenses tend to fall when the company gets more proficient with a new technology process.

That “value-selling” he refers to is TSMC’s ability to convince customers that it’s worth spending more money for their world-beating manufacturing technology. And clients like Apple, Nvidia, AMD and Intel are buying it.

In fact, TSMC was able to raise rates by the most in over three years. The Taiwanese company doesn’t release prices, but we can approximate it from the data it does provide. For the March quarter, it brought in US$4 650 (R68 200) for every 12-inch wafer it churned out for customers. That’s 10% higher than the prior quarter.

In the past, such stronger pricing could be explained by technology mix. A higher ratio of more advanced products raises that average, and vice versa. This time, however, its best offering — the 5-nanometre node — experienced an overall decline in sales from the prior quarter, accounting for 20% of revenue from 23%. There’s no need to worry about the drop — Apple is the largest buyer of these chips for its iPhones, and the March quarter is a lull in the annual smartphone cycle.

7nm line pumps

There was, however, a 20% rise in sales for the slightly older, but still very advanced, 7nm product. TSMC posted record sales of chips used in high-performance computing, which includes advanced graphics and artificial intelligence, that used this manufacturing node. Clients like Nvidia and AMD are major customers and are doing a roaring trade thanks to continued demand for machine learning and cloud computing. Nvidia, for example, is set to post a 43% increase in revenue for its April quarter, which would be the eighth straight period growth tops 40%.

Investors, and clients, should expect that pricing strength to remain, with CEO CC Wei on Thursday noting the company won’t cut prices, even in a downturn.

Not that we should expect a slowdown anytime soon. Continued demand for HPC as well as automotive chips will drive revenue over the next few quarters, but even in the long term, TSMC expects expansion to exceed its early projection for mid-to-high 20% annual growth in US dollar terms, Wei said.

With the world becoming ever-more digitised and connected, and the global chip shortage extending into its third year, the world’s number one player is looking stronger than ever. And its charging its customers accordingly. — (c) 2022 Bloomberg LP