A week after sharing a monthly sales report that was encouraging for chip developers, Taiwan Semiconductor (TSM) provided the group with some more positive news via its Q2 report and earnings call, and also did the same for chip equipment firms.
And to some degree, TSMC's outlook and commentary were encouraging for Apple (AAPL) as well.
In line with the monthly reports it had shared, TSMC reported Q2 revenue of NT$241 billion ($7.76 billion) -- up 3.3% annually and above April guidance of $7.55 billion to $7.65 billion. More importantly, TSMC, which is believed to handle over 50% of the world's chip contract manufacturing (foundry) activity, guided for Q3 revenue of $9.1 billion to $9.2 billion, up 9% annually at the midpoint and above a consensus analyst estimate of $8.93 billion.
In addition, TSMC, citing the accelerating pace of global 5G deployments, says it now expects its 2019 capital spending to be at the high end of a prior guidance range of $10 billion to $11 billion. That implies capex will be up from a 2018 level of $10.5 billion.
As of the time of this article, TSMC's shares are up 3.6% in Thursday trading to $43.14. A slew of chip equipment makers, including Applied Materials (AMAT) , KLA-Tencor (KLAC) and Lam Research (LRCX) , are also rallying, and The Philadelphia Semiconductor Index (SOXX) is up 1.4% on a day the Nasdaq is roughly flat.
It's worth noting that Q3 is a quarter in which TSMC's sales to Apple, and to some extent Apple suppliers such as Cirrus Logic (CRUS) and Broadcom (AVGO) , spike sharply as large orders arrive ahead of fall iPhone launches. On the earnings call, CFO Lora Ho mentioned that smartphones are the end-market that TSMC, which has long been the manufacturer of Apple's A-series mobile processors, expects to see the strongest growth for in Q3.
This by itself doesn't mean that Apple, whose shares are up 0.9% in Thursday trading with the help of a Raymond James upgrade, expects to see blockbuster iPhone sales this fall, particularly given that TSMC's smartphone-related sales were soft during the first half of 2019. But at a time when Apple's iPhone sales are already expected on average by analysts to be down 14% annually in the company's September quarter and 3% in its December quarter, it could mean that Apple, which reports on July 30, expects second-half demand to be better than some have feared.
TSMC also says that it expects strong Q3 sales growth for "high-performance computing" (HPC) products, which in its definition includes CPUs, GPUs and various data center chips. Strong demand from AMD (AMD) , which just launched desktop CPUs and gaming GPUs that rely on TSMC's advanced 7-nanometer (7nm) manufacturing process node and plans to soon launch 7nm server CPUs, is likely helping out here. Nvidia (NVDA) , which also recently refreshed its gaming GPU lineup, might also be stepping up its orders following a rough start to the year.
Apple and Nvidia are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AAPL or NVDA? Learn more now.
Meanwhile, with TSMC saying that its revised capex budget reflects expectations that 5G will boost chip demand for both its 7nm manufacturing processes and the first process to rely on its next-gen 5nm node, its capex guidance hike might partly be due to Apple's 2020 iPhone expectations. Next year's iPhones are expected to rely on a 5nm A-series processor, and are also expected to be Apple's first 5G smartphones.
And naturally, the guidance hike is a positive for chip equipment makers, many of whom have been hit hard by nosediving demand from memory manufacturers who are responding to plunging DRAM and flash memory prices by trying to curtail their production growth. TSMC's capex hike arrives a day after Dutch chip equipment giant ASML delivered better-than-feared results and guidance, while also reporting a major increase in orders from "logic" clients (defined as processor manufacturers and foundries) for its cutting-edge EUV lithography systems.
The chip industry is still dealing with its share of bad news, as weak memory prices, inventory corrections, trade tensions and (in some areas) soft end-market demand continue weighing. The sales warning delivered earlier this week by major chip distributor Arrow Electronics (ARW) drives this home, as does the downbeat guidance Broadcom issued in June.
But -- at the risk of sounding like a broken record -- a lot of bad news has already been priced into the shares of many chip developers and chip equipment makers. And TSMC's guidance, along with the numbers shared in recent weeks by ASML and memory giant Micron (MU) , acts as a fresh sign that the current industry down-cycle isn't as bad as many prior industry downturns.
