Taiwan Semiconductor Manufacturing (TSM) reported earnings of 90 cents per American depositary receipt today on sales of  $12.14 billion for the company’s September quarter. Net income climbed 36% year over year.
Analysts had expected the company to earn 81 cents an ADR and to show sales of $11.93 billion. In the September quarter of 2019 the company earned 62 cents per ADR and recorded revenue of $9.45 billion.
The company also raised its outlook for full year 2020 revenue for a second time this year to growth of more than 30%.
Taiwan Semiconductor is a member of my 50 Stocks Portfolio. The ADRs are up 83.8% since I added them to this portfolio on October 7, 2019. Today, October 15, the ADRs fell 0.51%. (Why the drop? Wall Street analysts were expecting the increase in guidance, it seems.)
As I read the numbers, there are two huge trends behind today’s beat and the increase in revenue guidance. And since both trends look to have long runways, I think the ADRs have further to go in a rally that has seen the stock climb 33% in the last three months and 55% for 2020 to date as of October 15. The ADRs, even after that run, trade at a price to earnings ratio of just 25.7 times forward projected earnings. (Taiwan Semiconductor pays a 1.92% dividend.)
Trend #1: 5G. The roll out of 5G phones–including Apple’s (AAPL) just announced new models–has led to a big increase in demand for chips from Apple and the company’s second-largest customer Huawei Technologies. In the quarter the company’s smartphone chip business grew by 12%. The high-performance computing segment revenue grew by 25%.
Trend #2: Taiwan Semiconductor is facing huge demand for its chips–not just for 5G phones but also in high-performance computing (AI and gaming to mention just two markets)–at a time when chip-making capacity is constrained. That has led to a situation where customers at the world’s largest independent chip foundry are willing to pay extra for silicon. Â Tim Culpan on Bloomberg notes that in the third quarter Taiwan Semiconductor charged a record $3,747 per 12-inch equivalent silicon wafer. That’s 9% more than in the third quarter of 2019 and 23% higher than three years ago. This kind of price increase isn’t a given–from 2013 to 2018 the company raised prices an average of 1.6% a year. But right now, especially for cutting edge manufacturing processes such as the 5-nanometer technology used to make Apple’s A14 chips and the only slightly larger 7 and 16 nanometer processes, Taiwan Semiconductor can exploit a technology edge created by Intel’s (INTC) delays in getting its newest processes running. (43% of the Taiwan Semiconductor’s revenue this quarter came from 5-nanometer and 7-nanometer chips.) How long will this pricing power last? Longer than a few quarters anyway. Looking at the company’s capital spending plans–$17 billion in 2020–Taiwan Semiconductor looks determined to increase its process edge if it can. There are only a few companies that have enough scale to support capital investment at this level. For chipmakers, big gets bigger.
Looking ahead, the good news from Taiwan Semiconductor, especially in the high-performance computing segment, forecasts good news from Nvidia (NVDA) when that company reports its earnings late in the earnings season on November 12.
