The world’s largest and most advanced semiconductor foundry, Taiwan Semiconductor Manufacturing (NYSE:TSM), just held its third-quarter earnings release and conference call, and the numbers were impressive. Revenue was up 29.2%, earnings per share were up an even higher 35.9%, and the company’s return on equity expanded 560 basis points to a stunning 31.3%.
Fueling those gains is TSM’s leading position at the most advanced semiconductor nodes, which includes the highly popular 7-nanometer node, which made up 35% of sales, and the new 5-nanometer node, which just began volume production and made up 8% of sales. The new Apple (NASDAQ:AAPL) 5G phone is powered by the A14 bionic chipset, which was made on the 5nm node and features 11.5 billion transistors — 40% higher than the A13.
While other Asian phone makers have rolled out their own 5G phones complete with 7nm chips, Apple’s first 5G phone should mark a breakthrough both for technology and customer adoption of 5G. Here’s what TSM had to say about the state of 5G adoption today, as well as the 5G outlook through 2022.
1. Demand for 5G phone chips is booming at smartphone vendors right now
TSM management said on the conference call with analysts that mobile customers are buying lots and lots of leading-edge 5G chips, as they worry about supply constraints to meet 5G demand. That bodes well for TSM’s business, as it got 46% of sales from its mobile chip segment last quarter — its largest current end market. Taiwan Semi expects continued strong demand for 5G will enable 5nm chips to go from 8% of sales in the quarter 20% of sales next year.
However, the anticipated demand has lead to high inventory levels at both TSM and its customers. One analyst actually asked if there was a danger customers were over-booking chips right now, which could lead to a sharp correction.
2. TSM management is confident it isn’t overproducing because everyone will need 5G in the next two years
In response, CEO C.C. Wei said that TSM wasn’t really worried about an inventory correction because the market for 5G is sure to grow over the next couple of years, though the timing may vary from quarter to quarter:
… because of the pandemic, the digital transformation has been accelerated and that created a lot of new demand. Let me say that, it looks like — take for example, now work from home, so, now everybody buy a PC, every kid had to buy a PC. And then just look at again on the 5G smartphones benefit. The advantage of the bandwidth and the speed and the low latency, everything, and people are going to need it in this digital transformation. And so, even right now is that, we expect inventory is higher than historical high-level, but the demand will pick-up. And in next year or 2022, we are confident that demand will pick up.
3. 5G will go from high-teens penetration this year to “much higher” next year
Analysts also asked management what it sees as the proportion of 5G smartphones sold in 2020. Management continues to see 5G is catching on faster than 4G did when it rolled out and that it expects overall 5G penetration to reach a high-teens proportion of smartphone sales this year. However, heading into next year, management declined to give an exact outlook, only that it would be “even higher, much higher, let me say that.”
4. 5G phones have way more semiconductor content per unit than 4G phones
The reason 5G is going to generate so much growth for TSM isn’t just that people are buying more units. In fact, it remains to be seen if smartphone unit sales, which have been stagnating for years, will grow overall in absolute terms; rather, growth is happening because each 5G phone unit will pack much more of a punch. TSM management, which has a better view on this than anyone else, says 5G phones will have 30% to 40% more semiconductor content per unit. That’s what’s driving the extremely high demand seen at TSM right now, since it’s the foundry of choice not just for Apple but a whole host of other semiconductor designers.
While eventually that growth will moderate as 5G matures, TSM appears to have a clear path to high growth over the next few years as consumers begin to adopt 5G and wireless networks improve their capability.
5. TSM applied for a license to supply Huawei but is not commenting on its status
Like most other chip companies and suppliers, TSM was subject to new U.S. restrictions on sales to Chinese tech giant Huawei, which the Trump administration cut off from sales with little warning on Sept. 15. TSM has applied for a license, and there has been some speculation from outside parties that it had been granted, but management would not confirm that and said it would not comment on the matter any further.
For the fourth quarter, TSM guided for sequential growth of 3.4%, along with gross and operating margins in line with the last quarter. That would be a great result in and of itself, but TSM has pretty much smashed its guidance every quarter in recent years, and I’d expect the same thing in Q4. Thus, TSM’s outlook certainly appears strong even without Huawei sales.