Taiwan Semiconductor (TSM 45.28, +0.89, +2.0%) is up 2.0%, as the company's upbeat outlook for the second half of the year overshadows weaker than expected results for Q1, putting shares just 2.9% shy of their record high from early 2018.
The company is an important component of the semiconductor industry pipeline, considering it manufactures chips for companies like Apple (AAPL 203.20, +0.07, UNCH), AMD (AMD 27.71, +0.21, +0.8%), Cirrus Logic (CRUS 46.88, +0.05, +0.1%), Huawei, NVIDIA (NVDA 186.37, -0.90, -0.5%), Qualcomm (QCOM 79.74, +0.66, +0.8%), and Texas Instruments (TXN 115.92, +0.32, +0.3%), among many others.
Taiwan Semiconductor's Q1 results showed weaker-than-expected earnings of NTD2.37 per share on revenue of NTD218.70 bln, which decreased 11.8% yr/yr but was slightly ahead of lowered expectations.
Gross margin for Q1 decreased to 41.3% from 50.3% one year ago, with some pressure caused by disruptions caused by a defective chemical, which resulted in increased amounts of scrap material.
Inventory increased 5.3% on a sequential basis but was up 27.5% yr/yr. Inventory turnover increased to 79 days from 67 days in the fourth quarter and 63 days one year ago.
Expectations for Q1 performance were curtailed going into the report, as the disruption from defective photoresist material was well-publicized while the global slowdown at the end of 2018 was expected to weigh on demand in early 2019.
The company expects a modest rebound in Q2, seeing gross margin improving to 43%-45% while operating margin is expected between 31% and 33%. Still, this would leave the company below its levels from last year, when gross margin hit 47.8% while operating margin was 36.2%. The company expects gross margin to reach 50% in the longer term.
Given weak results for Q1, guidance for a yr/yr decrease in Q2 sales, and no change in longer-term gross margin expectations, the implication is that the company expects a sharp snapback in activity in Q3 and Q4, which would significantly boost sales and improve the company's pricing power. Taiwan Semiconductor's management reaffirmed its expectations for slight sales growth in 2019 while its forecast for overall industry performance is flat relative to 2018.
Management expects growth during the remainder of the year to be fueled by sales of 7-nanometer processors used in high-end smartphones. Increased adoption of 5G technology is expected to support this growth.
With the stock approaching its record high, the market is buying into the idea that a sharp snapback in Q3 and Q4 will follow a soft Q2.