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Taiwan Semiconductor Manufacturing (TSM), the world's largest contract chip manufacturer, beat Q4 EPS expectations while also forecasting FY24 revenue to grow in the low-to-mid 20% range, signaling a healthy rebound for a semiconductor industry that continues to emerge from a deep inventory glut. The company's encouraging outlook is giving the broader semiconductor space a shot in the arm this morning, but NVIDIA (NVDA), Advanced Micro Devices (AMD), and Qualcomm (QCOM) -- each of which are TSM customers -- are displaying notable strength.

• A key driver underlying TSM's improving results and bullish outlook is the ramp up of its 3-nanometer (N3) chips which help power smartphones as well as high-performance computing (HPC), such as artificial intelligence (AI).
• In Q4, N3 chips accounted for 15% of TSM's total wafer revenue, compared to virtually zero in FY22. As AI-based technologies and applications expand in 2024, TSM expects revenue from its N3 technology to more than triple this year to account for a mid-teens percentage of total revenue.
• However, there is a downside to this explosion of growth. Specifically, as N3 chips become a larger portion of total revenue, gross margin is expected to take a hit -- at least in the intermediate term. In FY24,
  • TSM expects N3 to dilute gross margin by 3-4 percentage points, but the company continues to forecast long-term gross margin of 53% or better. An improved utilization rate due to stronger demand will help to offset the N3 headwind.
• Looking a bit further down the road, TSM says that its 2-nanometer (N2) technology development is progressing well with volume production on track to begin in 2025. Encouragingly, TSM added that it's seeing a much higher level of customer interest for N2 as compared to N3 for both smartphone and HPC applications.
• While TSM is expanding its capacity by constructing two new facilities in Arizona, the company still expects capital expenditures to remain roughly flat yr/yr in FY24 at $28-$32 bln. That is partly due to a delay in the construction of one of those two facilities with volume production now slated for 2027-2028 instead of the original forecast of 2026.

Overall, the main story is that TSM's brighter outlook for FY24 signals a healthy recovery for the company and for the semiconductor space, primarily driven by a more balanced supply and demand environment and rising demand from AI-based technologies. TSM did remind market participants that macroeconomic and geopolitical uncertainties remain and could weigh on market demand, but the company still is expecting a stronger year in FY24.