Taiwan Semiconductor's (TSM) guidance certainly didn't do anything to spoil the upbeat mood of chip stock investors.
At the same time, the fact that TSMC's stock is roughly flat following the numbers drives home just how much expectations have risen for the sector over the last few months.In addition to reporting Q4 revenue of $10.6 billion -- above October guidance of $10.2 billion to $10.3 billion, but already known thanks to monthly sales reports -- TSMC guided for Q1 revenue of $10.2 billion and $10.3 billion. That's comfortably above a $9.78 billion consensus and (with the help of favorable comps) represents 45% annual growth at the midpoint.
TSMC also reported that it spent $14.9 billion on capex in 2019. That number is well above 2018 capex of $10.5 billion, and near the high end of a guidance range of $14 billion to $15 billion.
And after stating in October that 2020 capex would be "somewhat similar" to 2019's level, the company set a 2020 capex budget of $15 billion to $16 billion.
Much of TSMC's capex will be directed towards its advanced 7-nanometer (7nm) manufacturing process node, which has seen stretched lead times amid big orders from the likes of Apple (AAPL) , AMD (AMD) , Qualcomm (QCOM) and Huawei's HiSilicon unit. The company also plans to invest heavily in starting volume productions for its next-gen 5nm node, which is expected to be used by Apple to make the processors going into its fall 2020 iPhone lineup.
And with TSMC eager to hold onto its recently-won manufacturing technology lead, the company plans to make initial investments in its 3nm process node, which is expected to see volume production start in 2022.
The capex guidance has given a lift to a slew of chip equipment stocks -- a group that has already surged as TSMC and Intel (INTC) have dialed up their capital spending and memory prices have stabilized. Applied Materials (AMAT) and Lam Research (LRCX) are up around 2%; some smaller players, such as Onto Innovation (ONTO) , Veeco Instruments (VECO) and Axcelis Technologies (ACLS) , are recording bigger gains.
On its earnings call, TSMC, which counts Apple, Qualcomm, MediaTek and Huawei's HiSilicon unit among its mobile processor clients, mentioned that its smartphone-related sales grew 16% sequentially in seasonally strong Q4 and accounted for 53% of revenue. The company also reiterated that 5G phone launches will be a major tailwind for it in 2020, thanks to the higher silicon content (on average) of 5G phones, and indicated that its phone-related revenue will "probably" grow more than 20% this year.
TSMC also forecast that its "high-performance computing" (HPC) sales -- defined by the company as covering CPUs, GPUs and various other PC and data center products -- will probably grow more than 20% this year. And it forecast automotive and IoT-related sales will probably grow by mid-teens percentages.
AMD, which is seeing strong demand for its 7nm PC and server CPUs, will undoubtedly provide a lift for TSMC's 2020 HPC-related sales. So might TSMC clients such as Nvidia (NVDA) , Xilinx (XLNX) and Broadcom (AVGO) .
Intel, too, might up its orders to TSMC in 2020. Though the chip giant has giant internal manufacturing operations, it's currently dealing with supply constraints that have led it to rely more on foundries, and certain Intel businesses have long relied on TSMC. On Thursday, Taiwan's Digitimes reported that Intel is looking to place 7nm chip orders with TSMC.
One wild card for TSMC: How new Huawei export restrictions being drafted by the U.S. Commerce Department impact the company. With regulators reportedly looking to lower the threshold for U.S.-made components within products that can require an export license from 25% to 10%, there's speculation that the rules could affect both TSMC's direct sales to Huawei/HiSilicon and the Huawei sales of clients such as MediaTek.
When asked on the call about the potential impact of the rules, chairman Mark Liu noted "the specifics about the rules" haven't been shared yet, and that TSMC will follow any laws set for it. He also said that TSMC's current guidance doesn't factor in any rule changes.
Huawei uncertainty aside, TSMC's guidance and commentary was upbeat almost across the board. And it's hard to ignore the fact that TSMC's Q4 report and call were preceded this month by positive sales pre-announcements from several chip industry firms.
But it's also hard to ignore that markets have often priced in a lot of good news for these companies. In TSMC's case, its stock is up more than 60% over the last 12 months, and is now trading for about 20 times its 2020 EPS consensus.
Against such a backdrop, a "good" earnings report might only allow a chip stock to hold onto its recent gains, rather than add to them.
