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Taiwan Semi (TSM -4%) endures moderate selling pressure today after Reuters reported that the U.S. ordered the world's largest chip manufacturer to cease shipments of advanced semiconductors to China-based customers. The restriction centers on chips used in AI applications destined for China.

TSM already has a history of ensuring that its products are not used in Chinese devices. For instance, Huawei, a China-based tech firm whose products were placed on a U.S. trade restriction list five years ago, has been known to leverage TSM's chips, with Reuters noting three weeks ago that TSM notified the U.S. of one of its chips being used in the Huawei Ascend 910B, the company's popular AI processor.

While TSM derives only around an eighth of its annual revenue from China, it is still its second-largest region behind the U.S. Also, the impact of today's news is unclear; Reuters added that TSM notified its affected clients that it would halt shipments. However, the story underscores a lingering concern over the uncertainty surrounding China due to the tensions between its government and the U.S.

• Like ASML (ASML) is dealing with, trade restrictions could profoundly impact TSM's future performance. ASML sunk to one-year lows last month, a roughly 40% correction from July highs after it issued alarming guidance. An underlying factor was uncertainty surrounding additional export restrictions. ASML noted that this unknown drove it to be much more cautious regarding China.
• On the bright side, TSM has stated that current export curbs on advanced chips -- first announced in October 2023 -- have a limited and manageable impact on its overall business. Not much has been mentioned on the topic since by TSM. Still, it is worth noting that management was unsure of the longer-term impact of the export restrictions. If more curbs follow, both the near and long term could encounter meaningful headwinds, especially as AI continues to comprise a greater percentage of TSM's overall revenue.
• In Q3, AI underpinned TSM's energetic report and Q4 guidance. The company anticipated the unwavering AI-related demand to result in the technology's revenue contribution to triple yr/yr, accounting for a mid-teen percentage of FY24 revs. Given the momentum of AI, this percentage may continue to expand in 2025. If the U.S. cracks down further on AI chips to China, TSM, which supplies to much of the tech industry, from NVIDIA (NVDA) and Advanced Micro (AMD) to Google (GOOG) and Apple (AAPL), could be dealing with a critical roadblock.

The suspension of AI chip shipments to China presents a minor setback for TSM. However, the report underscores a potentially more pressing issue TSM must face in the near future. Additional export curbs on big tech, such as NVDA's highly sought-after AI GPUs, could drastically impact TSM's future growth, bottlenecking its fastest-growing business, which has quickly become a crucial component of its annual revenue.