Shares of Taiwan Semiconductor Manufacturing (TSM 2.79%), Advanced Micro Devices (AMD 1.94%), and Broadcom (AVGO 2.99%) were on the rise Friday, appreciating 6.2%, 4.8%, and 4.7%, respectively, as of 2:14 p.m. ET.
The semiconductor industry has been in a downturn for most of 2023, with investors wondering when the sector will recover, and also what the trajectory of that recovery would be.
Today, TSMC reported its monthly October revenue, which surprised to the upside. Given that TSMC is the largest chip foundry in the world, and that AMD and Broadcom are big clients of TSMC, they rose too in a terrific day for semiconductor stocks broadly.
NYSE: TSM
Key Data Points
Nearly 35% growth in a single month
In October, TSMC reported revenue of 243.2 billion Taiwanese dollars, up a whopping 34.8% just over the prior quarter. And even relative to last year's October, revenue was up 15.7%. For the full 10 months of 2023 through October, revenue is now down slightly at (3.7%). But that's a big improvement; at the end of September, revenue for the year had been down (6.2%).
On its recent conference call, TSMC had guided that full-year revenue would be down in the high single digits or thereabouts. And even earlier in the year, TSMC had guided that full-year revenue would be down close to 10%.
So, today's update seems to indicate the semi cycle may be recovering quicker than thought. While TSMC has had a tailwind from artificial intelligence demand this year, specifically Nvidia (NVDA 3.17%) GPUs, TSMC management had noted earlier in the year that AI chips only made up a single-digit proportion of its revenue.
So, while AI chip demand is no doubt surging right now -- as most everyone knows -- it seems like other markets such as phones and PCs may be starting to turn up as well. In addition, automotive and industrial chips have been thought to be weakening recently, as demand growth for EVs has waned. However, the downturn is perhaps not as bad as feared.
There's also the possibility that other AI chips besides Nvidia's H100s are starting their ramp as well. On AMD's own recent earnings release, CEO Lisa Su anticipated some $400 million in fourth-quarter revenue for the company's new MI300 AI accelerator, which she projects rocketing to over $2 billion in sales next year.
Meanwhile, Broadcom is also a large client of TSMC's, and it rose despite continued delays of its acquisition of VMware. Broadcom is also benefiting from AI acceleration, as its data center switching and routing platforms are gaining adoption for the lightning-fast connections needed in AI training clusters.
TSMC is a bellwether
Investors in semiconductor stocks have done very well over the long term in general, but many don't invest in the sector because of the inherent cyclicality, which causes ecstatic booms and nauseating busts. That has led to many semiconductor stock valuations that aren't actually that demanding. For instance, TSMC, the outright leader in semiconductor manufacturing, trades at just 17 times trailing earnings, even after today's surge.
Yet semiconductors power all modern applications, from the PC to the smartphone to the cloud to artificial intelligence and autonomous cars. So all growth investors with long time horizons should have at least some exposure to the sector. This is especially true as we are about to come up on the one-year anniversary of the release of OpenAI's ChatGPT chatbot. With basically all big tech and chip companies now racing to enter the AI market, it still seems like we are in the early innings of the AI wave.
Based on TSMC's numbers, it appears we could be entering the next up cycle with force.
