Both 3Q23 results and 4Q guidance ahead of consensus
- TSM’s revenue decreased 14.6% y-o-y in 3Q23 to US$17.28bn while earnings were down 24.9% y-o-y, still ahead of the market expectations
- Management’s guidance for 11% q-o-q revenue increase at the midpoint in 4Q23, ahead of the market consensus
- Expect TSM to resume growth in 2024 driven by the increasing applications for 3nm chips and the revival in consumer electronics. Maintain BUY with TP of TWD 643.6.
Both 3Q23 earnings and 4Q guidance beat the market expectations
TSM’s results continued to be dragged by the end-demand softness from consumer electronics, yet there was a consistent quarterly improvement. The group generated 3Q23 revenue of US$17.28bn, down 14.6% y-o-y (up 10.2% q-o-q). Gross margin came in at 54.3% vs. 54.1% in 2Q23. GAAP earnings per ADR of US$1.29, down 24.9% y-o-y (up 13.2% q-o-q), ahead of the market expectations. In 4Q23, TSM expects sales to be c.US$18.8bn to US$19.6bn, up 8.8% to 13.4% q-o-q, slightly ahead of the market expectation. The gross margin is expected to be slightly lower, landing between 51.5% to 53.5%, mainly due to the dilution in the early stages of new 3nm production.
Growth resuming in 2024; maintaining edge in advanced logic foundry
TSM’s order demand has seen improvement, bolstered by the growing use of the 3nm wafer foundry in consumer electronics such as A17 chips for iPhones and the upcoming Snapdragon 8 Gen 3 chips for Android phones. TSM currently manufactures 3nm chips and plans to start 2nm mass production in 2025. Given TSM’s substantial engagement in the smartphone and IoT sectors (48% in 3Q23), we foresee growth in 2024. This growth will be fueled by the expanding applications of 3nm chips and a resurgence in consumer electronics. TSM has also observed some early signs of demand stabilization in the PC and smartphone market. In the long term, TSM’s forefront position in advanced logic foundry tech (3nm or below) and its vertical growth in backend operations will likely ensure a valuation premium over its competitors. With regards to the geopolitical tension between US and China, the US has recently extended TSM’s exemption from US trade sanctions on China, allowing it to continue shipping advanced chip equipment for its operations there. We maintain our BUY recommendation for TSM, setting a target price (TP) of TWD643.6 (US$10.0 per ADR).