Taiwan Semiconductor Manufacturing Company (TSM) revealed a positive outlook for the future, showcasing its confidence in near-term fundamentals and predicting more than 20% revenue growth in 2024. TSM's sunny 2024 outlook was met with enthusiasm, with shares rising by 5.7% and contributing to a boost in the semiconductor sector, including companies like AMD, Nvidia, and Broadcom.
The semiconductor industry experienced a challenging period in 2023, characterized by a prevalent inventory glut across the supply chain. TSM, as the world's largest contract chip maker, faced a 2% decline in revenue and a 19% drop in net profit for the October-December quarter. The company also reported a rare 9% decline in full-year revenue.
The slowdown was partly attributed to smartphone and computer manufacturers digesting inventories accrued during the pandemic electronics boom. However, there are indications that the electronics downturn is finally over.
TSM forecasts a return to growth in the current quarter and expects revenue to increase by more than 20% in 2024. Encouragingly, the smartphone market has started expanding again, with global shipments in the fourth quarter of 2023 growing by 8.5% compared to a decline of 3.2% for the entire year.
TSM's positive outlook is further supported by the growing demand for high-end chips used in artificial intelligence (AI) applications, particularly generative AI like ChatGPT. As a leader in chip manufacturing, TSM is a preferred partner for companies such as Nvidia, designing cutting-edge AI chips. The emerging trend of generative AI provides an additional boost to TSM's revenue growth.
While the company expects capital expenditure to remain at a similar level as in 2023, between $28 billion and $32 billion, there is a potential impact on gross margins due to the ramp-up of TSM's 3-nanometer process technology. The cost of building fabrication plants, reflected in depreciation expenses, can weigh on margins, especially in the initial stages. Sales of 3-nanometer chips accounted for 15% of TSM's revenue in the last quarter and are projected to increase further in 2024.
Consequently, TSM anticipates a potential 3 to 4 percentage point reduction in its gross margin for the year. However, the company remains confident in maintaining gross margins above 53% in the long term.
As a bellwether for the industry, TSM's positive outlook and strong revenue growth provide a favorable outlook for the chip supply chain. The recovery from the electronics downturn, with destocking largely completed, is welcome news for chip consumers and industry players alike. While there may still be questions surrounding future profitability due to heavy capital expenditures across the industry, the rebound in demand suggests a promising trajectory for TSM and the semiconductor sector as a whole.
In conclusion, TSMC's recent earnings report showcases its strong revenue growth, led by increased demand for high-end chips and the recovery of the smartphone market. The company's optimistic outlook for 2024, with expected revenue growth of over 20%, indicates a positive turn for the electronics industry. Challenges such as potential margin impact from the ramp-up of new technology and capital expenditure uncertainties remain, but TSMC's position as an industry leader and its confidence in maintaining gross margins bode well for its future performance.