Bull of the Day: Taiwan Semiconductor (TSM)

Premier sub-10 nanometer "fab" for Apple and NVIDIA chips is growing sales 37% and EPS 53% Read More...

Taiwan Semiconductor TSM is a central player in the manufacture of chips for companies like Apple, NVIDIA, and Marvell.

My colleague Derek Lewis profiled TSM last month and highlighted the company’s stunning doubling of revenue in less than 3 years.

This year’s topline will ramp a projected 37% to nearly $78 billion, while profits are expected to top $6.30 for 53% growth.

In 2021, Apple AAPL was the largest customer of the Taiwanese semiconductor foundry, aka TSMC, contributing a quarter of the company’s revenues.

Why TSM Services Are In High Demand

TSM is known as a “fab” or “foundry” for chip making. They take the designs of major semiconductor companies and execute their precise — and top-secret proprietary — manufacturing parameters.

And this precision and protected privacy has accelerated to new levels in the past few years.

Or maybe I should say it has “shrunk” to new levels.

Because Moore’s Law about chips doubling in power as they shrink in half every 18 months or so has been reaccelerated after leveling off in the past decade.

This means that chips have entered what I call The Nanosphere.

A nanometer is one-billionth of a meter. And chip micro-circuitry has gone under 10 nanometers in the past few years.

That’s why smartphones can do more even as they shrink.

And why NVIDIA NVDA can cram 50 billion transistors into the space of a shoebox for their advanced GPU (graphics processiing unit) cards that stack together for artificial intelligence engines in the DGX system.

This year, Taiwan Semi is helping major chip designers go to 5 nanometers (nm) and even 3nms!

To illustrate the microscopic scale of going sub-10nm, imagine how big the coronavirus might be.

Fact: the coronavirus is around 50 nanometers!

And TSM is the premier foundry for going sub-10nm.

Their only real competition is Samsung.

What if NVDA Stumbles?

Since NVIDIA might be TSM’s third or second biggest customer, investors might be concerned about this recent news…

NVDA shares plunged 6.6% in Wednesday’s extended trading session after it revealed that the U.S. government told it to stop exporting top artificial intelligence (AI) chips to China and Russia.

In a filing with the Securities and Exchange Commission, NVIDIA disclosed that the U.S. government informed it on Aug 26 about imposing a new licensing requirement, effective immediately, for its A100, A100X and forthcoming H100 integrated circuit sales in China and Russia.

The government has also banned NVIDIA from exporting DGX or any other systems that incorporate A100 or H100 integrated circuits.

The new licensing requirements will also be implied on any future chip designs developed by NVIDIA that have a threshold greater than or equivalent to A100. Additionally, any systems developed in the future incorporating the aforementioned types and thresholds will also fall under export restrictions.

With the new licensing requirements, the U.S. government intends to “address the risk that the covered products may be used in, or diverted to, a ‘military end use’ or ‘military end user’ in China and Russia,” per NVDA in the SEC filing.

Export Restrictions to Hurt NVIDIA Sales

NVIDIA’s A100 and H100 are its highest-performance chips used in data centers for AI, data analytics and computing applications. Though the company does not sell products to customers in Russia, the new licensing requirements are going to significantly hurt its data center chip sales in China.

The newly imposed restrictions are likely to impact the company’s ability to support the existing customers of A100 as well as complete the development of H100 timely. This could also require NVIDIA to transition some of its operations outside China.

The restrictions are expected to hamper NVIDIA’s business in China from where the company is expecting to generate $400 million in revenues from the sale of the aforementioned chips in the third quarter of fiscal 2023. The company warned that it may lose revenues if Chinese firms decide not to buy alternative NVIDIA products.

The latest restriction is a new blow to NVIDIA, which is already being hurt by the weakening demand for its chips used in gaming products. Last week, the company reported revenues of $6.7 billion for the second quarter of fiscal 2023, way lower than its May 2022 forecast of $8.10 billion (+/-2%), due to weaker sales across its Gaming and Data Center business segments.

NVIDIA’s Gaming segment revenues plunged 33% year over year due to a lower sell-in of Gaming products, reflecting reduced channel partner sales due to macroeconomic headwinds. Although Data Center revenues jumped 61% year over year, the company stated that sales were below expectations due to ongoing supply-chain disruptions and lower sales to China’s hyperscale customers, who are affected by economic conditions.

Considering the current business environment, the company issued dim revenue guidance for the third quarter, wherein it expects to generate $5.9 billion (+/- 2%) in sales, approximately 17% lower than the year-ago quarter’s revenues. Looking at the latest U.S. government’s restriction on chip sales to China, the company is highly probable to report third-quarter revenues way lower than its August 2022 guidance.

Bottom line on TSM: Despite NVDA’s downfall, with the SOX index down 35% since its highs and TSM down 43%, it seems the best value in chips right now trading near 13X EPS. Buy some TSM.

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