TSMC Expects to Overcome the Chip Downturn

The world's largest contract chip maker ended 2022 on a strong note. However, with a recession looming on the horizon in the United States, 2023 is likely to be a much more challenging year.
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Taiwan Semiconductor Manufacturing Co. (TSMC) is a leading semiconductor manufacturer that counts many of the biggest chip designers, including Apple and Nvidia, as its customers. TSMC is seen as a bellwether for the chip industry, and its recent forecast is cause for concern among chipmakers. According to TSMC, chip demand will remain weak in the first half of 2023. This is bad news for the semiconductor industry, which has been struggling in recent years.
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TSMC is one of the world's largest semiconductor foundries, and it plays a vital role in the production of many of today's most popular electronic devices. The company's stock has been on a tear lately, rising nearly 8% in the past month.
The company said Thursday that it expects this quarter's revenue to decline quarter-on-quarter due to weak demand for consumer electronics. At the midpoint of its guidance, sales would drop 14% from the December quarter in the first quarter of 2023.
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TSMC's gross profit margin is projected to be around 55% this quarter, compared with 62% last quarter. This could have a significant impact on the company's profits. TSMC plans to continue investing in its most advanced nodes, though capital expenditures are not expected to increase from last year's levels. The company is projecting to spend between $32 billion and $36 billion this year, compared with $36.3 billion in 2022.
TSMC has managed to perform better than many in the chip industry, but a slowdown is inevitable. Inventories at chip companies have piled up as demand for smartphones and personal computers falls off a cliff. Data center demand has been relatively resilient, but the market is starting to soften.
TSMC's revenue growth slowed down last quarter, but the company was able to offset the drop in demand by raising prices. A weak Taiwanese dollar also helped: TSMC's plants are based in Taiwan but most of its customers are overseas. The company's gross profit margin improved by nearly 2 percentage points last quarter, to 62%.
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Counterpoint Technology Market Research expects the foundry industry's revenue to drop by 5% to 7% year-over-year in 2023. However, TSMC is optimistic that it will outperform the industry, with a strong rebound in the second half. The company forecasts that its full-year revenue will still exceed 2022 levels.
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The demand for its most advanced 3-nanometer nodes will affect whether it can achieve its ambitious target. Customers such as Apple will likely want to put those new chips into their new smartphones and laptops. However, the real demand will depend on the state of the global economy. With a possible recession looming, consumers may not be as inclined to purchase new gadgets this year.
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TSMC is likely to outperform most of its competitors in 2023, thanks to its strong technology and healthy margins. However, meeting its ambitious guidance may prove to be a challenge, unless the US manages to land softly and Chinese households and businesses start spending again.