Amid dwindling demand from key clients like Apple, Advanced Micro Devices, and Intel, Taiwan Semiconductor's saving grace might just be the burgeoning field of generative AI. Despite economic slowdowns and recession fears, the resilient demand for AI technology offers a beacon of hope for the semiconductor giant.
Recession and geopolitical risks impact TSM
The Taiwan Semiconductor Manufacturing Company Limited (TSM) has been tackling looming threats of a possible recession, intensified by geopolitical risks. The company is seeing the ripple effects of these issues with FQ2'23 revenues taking a significant hit. This downturn is largely due to the shrinking global demand for electronics as corporate capital expenditures become more restrained and discretionary spending is curbed due to the heightened interest rate environment.
TSM's woes are not isolated. Its key clients, including Apple, Advanced Micro Devices, and Intel, are experiencing their own share of difficulties with decreasing demand. Companies like Foxconn have reported a downturn in their FQ2'23 revenues, signaling Apple's lowered sales for their Mac and iPad products. The same trend is anticipated for AMD and INTC due to ongoing PC/CPU challenges.
NVIDIA and generative AI demand ease TSM's burden
Despite the gloomy landscape, NVIDIA emerges as the silver lining. The company's impressive forward guidance, driven by robust demand for generative AI, provides a temporary reprieve for TSM by absorbing its excess capacity. As the quantification of the generative AI total addressable opportunity is still ongoing, it reinforces the strong belief in the structural mega trend driving TSM's long-term growth.
While TSM may ultimately be successful in executing its operations in Arizona, this venture could also impact its bottom line. The foundry's earnings from the Arizona plant could potentially be reduced by half compared to the Taiwan plants. This potential cut in earnings is not surprising, considering the significant differences in construction/labor/material costs and work culture between the US and Taiwan.
Generative AI presents significant growth potential
Generative AI currently constitutes a mere ~6% of TSM's revenues. However, with management projecting an exceptionally bullish compound annual growth rate (CAGR) of up to +50%, the potential for revenue growth is substantial. The expanding Generative AI Total Addressable Market (TAM) could reach up to $150B by 2028, with TSM potentially capturing nearly ~25% of those revenues.
