Taiwan Semiconductor (NYSE: TSM) and ASML (Nasdaq: ASML) are two of the biggest bellwethers in the artificial intelligence space. Taiwan Semiconductor is dominant in leading manufacturing processes favored by AI companies while ASML has a monopoly on the advanced EUV process needed to create leading-edge chips.
So, both companies dropping by large amounts after earnings this week caused waves in artificial intelligence investing circles. In the video below, 24/7 Wall Street Analyst Eric Bleeker breaks down why these earnings aren’t as much a negative for the artificial intelligence market as they are for other semiconductor areas. If you’d prefer to read instead of watch a video, we also have key points and a transcript below.
Why Taiwan Semiconductor’s Earnings Say Less About AI and More About the Broader Semiconductor Market
Key Figures from Taiwan Semi and ASML’s Earnings
Some of the most important points for AI investors from Taiwan Semiconductor’s earnings include:
- Taiwan Semiconductor still projects AI revenues to grow at a 50% compounded annual growth rate (CAGR) across the next 5 years.
- It projects AI accelerators to reach a “low teens” percentage of revenue by the end of 2024 and hit 20% of revenue by 2028.
- In total, high-performance computing hit 46% of revenue in the first quarter. This is up from 43% the year prior.
It’s very important to note that Taiwan Semiconductor’s largest customer is still Apple (Nasdaq: AAPL). They still collect more revenue from markets like smartphones, EVs, and IoT than they do from leading-edge artificial intelligence. So, any earnings in the near term are going to be more influenced by broader semiconductor weakness.
In the recent quarter, Taiwan Semiconductor saw plenty of this:
- Smartphone revenues fell from 43% of sales last year to 38% in the most recent quarter.
- Taiwan Semiconductor’s automotive and IoT segments also saw sluggish sales growth. Electric Vehicles have far more semiconductors compared to traditional gas-powered vehicles, but EV sales have been slumping in markets like the United States.
- Finally, when sales for things like AI servers increase, that’s not all upside for Taiwan Semiconductor. Booming AI server sales last quarter led to a reduction in spend on traditional servers, which brings down the upside from the AI server boom.
It’s a similar story for ASML. The company reported bookings of €3.6 Billion versus expectations of €7 Billion, which is a massive miss. However, the company stuck to its guidance for 2024 and maintains robust volume in the memory market, where companies are catching up to huge order rates for High Bandwidth Memory (HBM).
While ASML’s quarter was “disappointing,” like Taiwan Semiconductor it says more about non-AI markets than the growth of AI.
Full Video Transcript on Taiwan Semiconductor and ASML’s Earnings
Austin Smith:
Let’s stick with AI for a minute. We’re looking at Taiwan Semi and ASML falling after earnings. Everybody’s been calling for the AI bubble to pop and the AI rally to end. This is the first we’ve actually seen some sort of maybe consistent weakness.
Of course, if you look over the past year, these stocks are still up by an enormous margin. But I’m wondering, is the AI stock rally over?
Eric Bleeker:
Yeah, and so you mentioned the two companies at the outset, ASML and Taiwan Semiconductor.
Without question, two of the most important companies because they’re deep in the supply chain for AI chips. They’re both down big this week – ASML down more – but TSM is close to correction territory.
What I want to do is unpack the numbers to see what’s really reflective of AI versus maybe some broader weakness in semiconductors and other markets.
So, when we look at Taiwan Semiconductor they have been predicting that AI accelerators would be a low teen percent of their revenue this year and reach up to 20% by 2028.
And high-performance computing, which encompasses a lot of AI, is 46% of their revenue. I should say, which is increasing.
But here’s the key point. Just because AI spending is rising, it doesn’t mean that all the other technology markets are rising as well. And what’s going on with Taiwan Semiconductor and its results that have been disappointing to Wall Street is many of these other sectors are struggling.
Let’s look at computer servers. AI servers have been booming. If you’re looking at a company like Super Micro Computer (Nasdaq: SMCI), they’re on the leading edge of this, and they’re gaining more compared to companies like Dell and HP.
And why is that? Well, the companies that were leading in traditional servers like Dell and HP have more to lose as other server spend goes away. Whereas Super Micro as an emergent company in AI servers gets more of the upside.
And then we look at other categories as well. Smartphones were previously 43% of Taiwan Semiconductors’ revenue. Now they’re 38% because the category is struggling.
And electric vehicles, one look at Tesla‘s (Nasdaq: TSLA) stock chart says what’s going on with EVs. That’s another growth area in semiconductors, but it’s now struggling.
My key point here is when you’re looking at semiconductor supply chains, there’s a lot of association between a company like ASML or Taiwan Semiconductor.
Their AI portion can still be growing just as strong, but other semiconductor markets can hold them down.
I think that’s what’s going on because TSM in their recent earnings, they’re still maintaining a projection of AI growing at a 50% compounded annual growth rate. As an investor, I’m looking at this as potentially an opportunity.
Thank you for reading! Have some feedback for us?
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