Taiwan Semiconductor's (TSM) latest earnings report and call featured some positives for Apple (AAPL) and chip equipment firms, and perhaps to some extent for AMD (AMD) , Nvidia (NVDA) and mobile chip suppliers as well.
A week after releasing a monthly sales report that confirmed its Q3 revenue was above the guidance it issued in July, TSMC guided in its Q3 report for Q4 revenue of $10.2 billion to $10.3 billion. That's equal to roughly 9% annual revenue growth and comfortably above a pre-earnings consensus estimate of $9.92 billion.
TSMC, easily the world's biggest chip contract manufacturer (foundry), also hiked its 2019 capital spending budget to a range of $14 billion to $15 billion. Three months ago, the company had merely said that its 2019 capex would "likely" be above the high end of an initial guidance range of $10 billion to $11 billion. For comparison, 2018 capex only amounted to $10.5 billion.
On the earnings call, CEO C.C. Wei said that $1.5 billion of the increase in TSMC's capex budget relative to its original guidance was related to its cutting-edge, 7-nanometer (7nm), manufacturing process node, which has begun seeing stretched lead times due to high demand. The remaining $2.5 billion is related to TSMC's next-gen 5nm process node, for which the first process (known as N5) is set to enter volume production during the first half of 2020.
In addition, Wei said that TSMC's 2020 capex would be "somewhat similar" to 2019's elevated level. An official capex budget will be shared in January at the time of TSMC's Q4 report.
With TSMC manufacturing the 7nm, A13 Bionic system-on-chip (SoC) that powers Apple's 2019 iPhones as well as a slew of other iPhone chips developed by Apple and third-party suppliers, healthy iPhone 11/11 Pro demand appears to have something to do with TSMC's second-half sales momentum. Two weeks after Japan's Nikkei reported that Apple has upped its production orders for 2019 iPhones, Wei noted smartphone-related demand was the reason TSMC topped its Q3 revenue guidance, and forecast that demand from both smartphone and "high-performance computing" (HPC) end-markets would continue to grow in Q4.
In addition, Wei struck an upbeat tone regarding 2020 chip demand related to 5G smartphones. He asserted that this demand is behind TSMC's capex budget hike, predicted 5G smartphone sales will ramp faster than 4G smartphones did about a decade ago and (like many others) forecast 5G phones will have "substantially higher" silicon content than their 4G counterparts.
Apple, which in the fall of 2020 is expected to launch 5G iPhones powered by an SoC made using TSMC's N5 process, is undoubtedly expected to drive a large chunk of this 5G-related chip demand. But it's worth noting that TSMC also acts as a foundry for Huawei and a number of independent mobile chip suppliers, such as MediaTek, Broadcom (AVGO) , Cirrus Logic (CRUS) and (though it also relies on Samsung for its foundry needs) Qualcomm (QCOM) .
Wei's forecast that HPC demand would continue growing in Q4 might reflect well on the demand that TSMC clients AMD and Nvidia are seeing. This is tough to know for sure, since for TSMC "HPC" products include many different chips going inside of PCs and data center hardware.
But with that said, AMD has seen a strong early reception for both the 7nm desktop and server CPUs that launched this summer and (thanks in part to Intel's manufacturing process delays) offer pretty strong value propositions. And Nvidia has begun seeing GPU demand improve in recent months, now that the inventory corrections that badly hurt first-half sales have ended.
Meanwhile, it's easy to understand why TSMC's plans to spend heavily on capex this year and next are good news for chip equipment makers such as Applied Materials, Lam Research and KLA-Tencor, which have been hit hard by weak demand from DRAM and NAND flash memory makers amid an industry downturn. Shares of these companies, which have already rallied a fair amount since June, rose moderately following TSMC's report.
Chip equipment makers could also get a lift in the near-term from higher spending by Intel, which is reportedly dealing with supply constraints for its 14nm process node. We'll know more when Intel, whose 2019 capex budget currently stands at $15.5 billion, releases its Q3 report on October 24th.
Apple and Nvidia are holdings in Jim Cramer's Action Alerts PLUS member club.