Story Stocks^®

Taiwan Semi (TSM -3%) is getting chipped lower today after guiding Q1 revenue below analyst expectations. With earnings season right around the corner for a lot of tech names, TSM's guidance is an important data point in terms of what to expect from other companies and this guidance was a bit concerning. Samsung's weak guidance today adds to our concerns.

• As the world's largest contract chipmaker, TSM serves a broad range of end-market applications with the vast majority of revenue from high performance computing (41% of 2022 revs), smartphones (39%), IoT (9%), automotive (5%), and consumer electronics (3%). Major customers include Apple, AMD, Broadcom, Intel, NVIDIA, and Qualcomm.
• Revenue for March fell 15.4% yr/yr to NT$145.41 bln and was down 10.9% from February. For all of Q1, revenue rose 3.6% yr/yr to NT$508.63 bln. The monthly sequential decline tells us that the quarter ended on a weak note, which is a bit troubling and not a great sign for TSM's customers as we head into earnings season.
• In fairness, TSM did warn on its Q4 call in January that it was observing softness entering 2023 in consumer end market demand. Data center-related verticals were softening as well. TSM explained that customers were likely focusing on working down existing inventory before buying new product. As such, TSM predicted that semiconductor supply chain inventory would be reduced sharply through 1H23 to rebalance to a healthier level.
• TSM also said that it expected revenue to decline mid to high-single-digits yr/yr in 1H23 in US dollars. But there were some glimmers of hope as well as TSM said it was starting to see initial signs of demand stabilization. It also forecasted the semiconductor cycle to bottom sometime in 1H23 and to see a healthy recovery in 2H23. We just wonder if this Q1 guidance may cause investors to fear that TSM will turn more cautious on that outlook during its Q1 call on April 20.

Overall, the guidance was a bit of a letdown, although not entirely surprising given TSM's prior cautious comments. Investors need to remember that TSM is coming off a big year in 2022 with revenue jumping 33.5% in US dollars, fueled by a surge in HPC revenue (+59%) as well as strong growth in smartphones (+28%) and IoT (+47%). As such, some pullback should be expected. But this does make us incrementally more nervous ahead of earnings for some big tech names in the coming weeks.