The Zhitong Finance App learned that TSM.US (TSM.US), which has the title of “King of Global Chip Foundry,” announced its first year-on-year increase in net profit due to strong demand for artificial intelligence (AI) chips around the world, which has greatly boosted the scale of revenue generated by the chip foundry business. The core chip foundry of many US chip design giants such as Apple, Nvidia, and AMD achieved a 9% year-on-year increase in net profit in the first three months of this year to NT$225 billion (approximately US$7 billion), which greatly exceeded the average expectations of Wall Street analysts of NT$21.9 billion, and TSMC management's overall revenue outlook for Q2 was higher than analysts' general expectations.

The world's largest contract chip manufacturer and listed company with the highest market capitalization in Asia also announced the fastest pace of revenue expansion since 2022, indicating that global technology companies' extremely strong demand for AI chips, the core infrastructure in the AI field, is beginning to offset the impact of the smartphone market, especially the relatively sluggish demand for the Apple iPhone series.

According to financial data, TSMC's monthly revenue in March reached NT$19.521 billion, up 34% year on year and 7.5% month on month. Total revenue for the first quarter of January to March 2024 was NT$592.64 billion, up 16.5% year over year, higher than analysts' general expectations of NT$579.5 billion. TSMC's total Q1 revenue equivalent in US dollars was approximately US$18.87 billion, an increase of 13% over the previous year. TSMC management estimates total revenue range of 19.6 billion US dollars to 20.4 billion US dollars for the second quarter, exceeding analysts' general expectations of 19.1 billion US dollars.

TSMC welcomes strongest revenue growth since November 2022

As of 2023, Apple is still TSMC's largest chip OEM customer. Apple contributed about a quarter of TSMC's total revenue in 2023. However, at the beginning of this year, sales of Apple's iPhone series products fell sharply in the Chinese market, which in turn led to a sharp drop of nearly 10% in the first quarter of Apple's iPhone shipments, which saw a steady decline in the global smartphone industry as a whole.

According to IDC's latest statistics, global mobile phone market shipments increased to 289.4 million units, an increase of about 7.8% over the same period last year. Among them, Samsung Electronics (Samsung Electronics) regained the top spot. Brand Transsion (Transsion), which focuses on the budget, achieved a sharp 85% increase in shipments, and Xiaomi's first-quarter data also rebounded, completely narrowing the gap with Apple (Apple), which ranked second.

Judging from TSMC's revenue share, the HPC business and smartphone business, which mainly focus on high-performance server GPU chips (such as Nvidia H100/H200 AI GPUs and AMD MI300X GPUs) and PC-side chips, still account for the majority, reflecting the strong demand for these three types of chips, which is expected to drive the entire chip industry's recovery cycle. Performance data shows that the HPC business accounts for 46% of revenue, followed by the smartphone business, which accounts for 38% of revenue.

In terms of chip process revenue data for the first quarter, TSMC's current highest-end 3nm chip process accounts for 9% of total revenue, 5nm accounts for 37%, and 7nm accounts for 19%; advanced technology (defined as 7nm and more advanced technology) accounts for about 65% of TSMC's total revenue scale. According to reports, the Nvidia H100/H200 AI GPU and AMD Mi300 series are mainly focused on 5nm, and the Nvidia B100/B200/GB200 is expected to focus on TSMC's 3nm process.

Statistics show that since the historic low of stock prices in October 2022, TSMC's market value has increased dramatically by about 340 billion US dollars, and Wall Street investment institutions generally bet that TSMC will be one of the most obvious winners in the feverish wave of global enterprise deployment of artificial intelligence technology. The company set a capital expenditure budget of 28 billion to 32 billion US dollars for 2024 at the beginning of this year. TSMC still predicts annual capital expenditure in this range, and it is estimated that 70% to 80% of the capital expenditure in 2024 will be used for advanced process technology.

From a long-term perspective, investors expect AI-focused chips to gradually account for TSMC's larger revenue share. In January of this year, TSMC predicted that the company's revenue related to AI chip foundry is growing at a compound annual growth rate of 50%. However, some analysts have warned that the current unparalleled level of demand for AI chips may not continue for the next few years.

TSMC said in January of this year that as the overall recovery process of the semiconductor market accelerates, total revenue is expected to increase by at least 20% this year, but uncertainty still exists due to global macroeconomic fluctuations. The results announced on Wednesday by ASML.US (ASML.US), its main supplier and the sole supplier of the world's most advanced chip manufacturing equipment, showed that the order volume for the first quarter fell 22%, so Asmack's stock price fell 7% on Monday, and led global chip stocks to plummet.

However, after TSMC's Q1 results were announced, global chip stocks can be described as having a big collective rebound. TSMC's US stock ADR surged more than 5% in night trading on US stocks, driving Nvidia's stock price to soar by nearly 3% in night trading, Micron by more than 3%, and Chaowei Computer by more than 2%. In the Japanese stock market, shares of Edwin Test, a supplier of memory chip testing equipment for AI tasks, soared more than 5%. During the South Korean stock market trading session, the stock price of SK Hynix, the main supplier of HBM storage systems equipped with Nvidia's AI GPUs, rebounded nearly 3% on Thursday. In Hong Kong stocks, Huahong Semiconductor and SMIC, the two major Chinese chip foundry leaders, both rose more than 2%. At one point, Huahong Semiconductor rose more than 5%.

TSMC has top core crafts+chiplet's “packaging magic”

After a lapse of four years, TSMC, which has the title of “King of Chip Foundry,” has returned to the top ten listed companies in the world by market capitalization. TSMC's US stock ADR has risen as high as 34% since this year, outperforming the Philadelphia Semiconductor Index by a large margin. In the current context of surging demand for AI chips, TSMC, as the world's leader in AI chips, Nvidia, and the only foundry for AI chips developed in-house by cloud giants such as Microsoft and Amazon, is bound to continue to benefit. With the world's top core manufacturing technology and the most advanced Chiplet packaging, TSMC's “Nvidia Moment” — the moment when stock prices and performance begin to surge at the same time — may have arrived.

With decades of core manufacturing technology accumulation in the field of chip manufacturing and a long time at the cutting edge of chip manufacturing technology improvement and innovation (pioneering the FinFET era, leading the 2nm GAA era), TSMC has long dominated the vast majority of global chip foundry orders, especially those with advanced manufacturing processes of 5nm and below, leading the world's advanced process and packaging technology, and high yield.

High-performance AI chips for AI training/inference are currently most in demand, such as the Nvidia H100/H200 and AMD MI300 series, which are all used on the server side of major data centers around the world. TSMC, on the other hand, can be described as stuck in the neck of Nvidia and AMD by itself.

TSMC is currently the only chip OEM for Nvidia's AI chips, the A100/H100, which are in extremely strong demand, and Nvidia is the absolute leader in the global AI chip market, accounting for 80% to 90% of the market share. Wall Street firm Citi expects the AI chip market to be around 75 billion US dollars in 2024. At the same time, AMD's latest flagship AI chip MI300X is expected to account for about 10% of the market, and TSMC is also AMD's exclusive chip OEM. These all show the unrivaled importance of TSMC in providing foundry services to top chip companies.

More importantly, with its industry-leading 2.5D/3D advanced packaging, TSMC is currently eating almost all orders for high-end chip packaging with a manufacturing process of 5 nm and below in the market, and the production capacity of advanced packaging is far from meeting demand. The short supply of Nvidia H100/H200 is limited by TSMC's 2.5D level CowOS package production capacity. According to media reports, due to the huge number of orders for the Nvidia H100/H200 and B100/B200 series, and the popularity of AMD orders, advanced packaging production capacity based on TSMC's 3nm, 4nm, and 5nm processes is already fully loaded.

As the cost of compressing more transistors onto silicon becomes more and more expensive, chiplet advanced packaging is an area attracting the attention of global chip companies. In our “post-Moore era” (Post-Moore Era), breakthroughs in advanced chip manufacturing processes are extremely difficult (such as quantum tunneling effects and exponential growth in development costs). Coupled with the gradual entry into the AI era and the trend of the Internet of Everything becoming more obvious, computing power requirements brought about by various tasks may surge, such as deep learning tasks, training/reasoning, AI-driven image rendering, recognition, etc. These tasks all require very high hardware performance, which means that a separately integrated CPU or GPU like a PC can no longer meet the computing power requirements.

As a result, Chiplet's advanced package came into being. Chiplet packaging technology enables different GPU modules, or CPUs, FPGAs, ASIC chips, etc. to work together in the same system to maximize and efficiently schedule the computing power of various types of chips to provide large-scale parallel computing capabilities. IDC expects TSMC's CoWOS production capacity to increase sharply by about 130% by the second half of 2024. According to a recent study by Markets And Markets, another research institute, the total Chiplet market for Chiplet advanced packaging products and advanced packaging technology (2.5D/3D, SiP, WLCSP, FCBGA, and FAN-Out) covering chips such as GPUs, CPUs, and FPGA chips is expected to reach about 148 billion US dollars in 2028, with a compound annual growth rate (CAGR) of an astonishing 86.7%. According to the agency's estimates, the total Chiplet market may be only 6.5 billion US dollars in 2023.

The current supply of AI chips is far from meeting demand. At the Nvidia performance conference in February, CEO Hwang In-hoon said that Nvidia's latest products will continue to be in short supply for the rest of the year. Wong In-hoon stressed that although supply continues to grow, demand is showing no signs of slowing down to any extent.

The current demand for AI chips can be described as extremely strong, and this will probably be the case for a long time to come, and the AI chip manufacturing process mainly focuses on advanced processes at 5nm and below. According to the latest forecast from market research firm Gartner, the AI chip market size will increase 25.6% over the previous year to reach US$67.1 billion by 2024. It is estimated that by 2027, the AI chip market is expected to be more than double the size of 2023, reaching US$119.4 billion. According to the AI chip market size forecast report recently released by the well-known market research agency Precedence Research, the AI chip market size covering CPU, GPU, ASIC, and FPGA types is expected to surge from about US$21.9 billion in 2023 to US$227.48 billion, and the compound growth rate is close to 30% in 2023-2032.

Before the Q1 earnings report was released, Wall Street was collectively bullish on TSMC's future market

Prior to the release of TSMC's earnings report, Wall Street bank Goldman Sachs maintained the agency's “buy” rating and raised the target price from NT$760 to NT$975 (as of Thursday's close, TSMC shares closed at NT$804). Goldman Sachs mentioned in the report that in a situation where the supply of AI chips is in short supply, the most direct way to solve the shortage of AI chips in the short term is to increase CowOS production capacity, and TSMC is the core of this.

In terms of CoWOS production capacity, Goldman Sachs raised its CoWOS advanced packaging production capacity forecast from 3040,000 to 441,000 to 319,000-600,000 in 2024-2025, and production capacity is expected to double by 2025. This means that TSMC's CoWoS production capacity will increase 122% year on year this year and 88% year on year next year.

Another major Wall Street bank, published a research report predicting that TSMC's revenue in 2024 and 2025 will increase by 26% and 29% respectively, and believes that TSMC's profit data is growing at an accelerated pace, raising next year's profit forecast data by about 4%; Citi raised its target price sharply from NT$740 to NT$950, reaffirming the “buy” rating.

According to Wall Street analysts' target price compiled by TipRanks, TSMC's highest bullish price for the 12-month period was as high as $188 (the latest closing price was $139.030), and the analyst consensus rating was a “strong buy.”

SusqueHanna, a well-known investment agency on Wall Street, recently raised TSMC's 12-month ADR target price from $160 to $180 to maintain a “outperforming market” rating; Needham recently raised TSMC's ADR target price from $133 to $168 to maintain a “buy” rating; HSBC Research recently raised TSMC's ADR target price from $119 to $164, maintaining a “buy” rating.