Update on TSM, ASML, and semis market

Today saw Super Micro (SMCI) drop 23% and Nvidia (NVDA) drop 10%.

The first story I read explaining the drop said that Super Micro announced they were reporting earnings on April 30, which is the day they had already set prior. Basically, they just confirmed the date of earnings. However, the article said because Super Micro did not pre-announce it was now tanking implying pre-announcing was priced in. I can no longer find this story now as I think it may have been taken down.

Next I read that Taiwan Semiconductor, and ASML had poor reports which were dragging down the market. Having a look into both of these companies, they are seeing slowdowns in many markets but AI is not one of them.

Here’s what management from TSM said in their latest earnings about the semis market,

Yes, smartphone end-market demand is seeing gradual recovery and not a steep recovery, of course. PC has been bottomed out and the recovery is slower. However, AI-related data center demand is very, very strong. And the traditional server demand is slow, lukewarm. IoT and consumer remain sluggish. Automotive inventory continue to correct, okay?

So almost every category of semis is weak, except for AI data center.

Taking a look at their estimates, actuals and guides from the last quarters, and the numbers seem reasonably good.

TSM Guided last Q,
18 - 18.8B revenue, actual 18.9
gross margin 52-54%, actual 53.1
operating margin 40-42%, actual 42%

And their guide for the upcoming Q,
revenue 19.6 - 20.4B
gross margin 51-53%
operating margin 40-42%

They list a number of reasons why their gross margin ticked down such as,

  • On April 3, an earthquake of 7.2 magnitude struck Taiwan, and the maximum magnitude fabs built to handle was 5
  • Fully recovered from the earthquake on the third day, and no major damages to critical tools
  • A certain number of wafers were impacted and had to be scraped
  • Total impact for the earthquake is lower gross margin for Q2 by 50 basis points
  • Electricity price in Taiwan has increased by another 25% starting April 1 this year
  • Already a 17% increase in electricity from last year
  • Electricity costs taking down 70 to 80 basis points from Q2 gross margin
  • Newer fab plants they are building are only reaching volume production in the years 2025, 2027, and 2028

So there’s basically three good reasons that make sense why gross margins are coming down. They are,

  1. An earthquake which they recovered from quickly
  2. Electricity price increases of greater than 25%
  3. Massive expansion of facilities which won’t be production ready this year

Despite all these factors they still matched their gross margin guide this quarter and are only guiding for -1% on the guide for next quarter.

Some take aways from their last call on April 18,

  • High Performance Computing (HPC) increased 3% qoq and accounts for 46% of Q1 revenue
  • Smartphone decreased 16%, to account for 38%
  • Expect Q2 revenue to be a 6% sequential increase to 19.6 - 20.4B, or 27% yoy
  • “Our overall business in the second half of the year to be stronger than the first half”
  • We expect that our business to grow qoq throughout 2024
  • Almost all the AI innovators are working with TSMC to address the insatiable AI-related demand for energy-efficient computer power
  • We forecast the revenue contribution from several AI processors to more than double this year and account for low-teens percent of our total revenue in 2024.
  • For the next 5 years, we forecast it to grow at 50% CAGR and increase to higher than 20% of our revenue by 2028
  • We expect several AI processors to be the strongest driver of our HPC platform growth and the largest contributor in terms of our overall incremental revenue growth in the next several years.
  • Next production facility to come online soon is in Kumamoto Japan using 12/16 and 22/28 nanometer chips (these are older style chips)
  • Arizona on track for first half of 2025 production, second Arizona fab scheduled to begin in 2028
  • Another Japanese fab is set to come online in 2027
  • “TSMC will be the most efficient and cost-effective manufacturer in the region that we operate”
  • N2 technology leads industry in addressing the insatiable need for energy-efficient computer
  • Smart phone end market is seing a gradual recovery and not a steep recovery
  • Projected numbers included having the automotive industry growing in demand, but now seeing it decreasing overall
  • As a key enabler of AI we will work with our customers closely to plan the appropriate level of capacity to support their needs
  • “I wouldn’t call it a digestion year”, investing heavily
  • We’re hearing your major customer is demanding for 2x capacity next year
  • “The demand is very, very strong, and we done our best where put all the effort to increase the capacity. It’s probably more than double this year as compared with last year. However, it’s still not enough to meet the customers’ demand” (I believe this dialogue is for AI only, but question was first translated from Chinese)
  • “Let me say again, the demand is very high, extremely high. And we do our best to increase the capacity to alleviate the shortage.”
  • Most AI accelerators using 5 nanometer, and 4 nanometer tech
  • Now looking at 2-nanometer and energy efficiences that customers demand
  • See very strong cash flow in the quarter
  • On device AI will be very positive for TSMC because we will capture the larger share of the market

The paragraph from the transcript that looks to have started the selling on the news was,

We lowered our forecast for the 2024 overall semiconductor market, excluding memory, to increase by approximately 10% year-over-year, while foundry industry growth is now forecast to be mid- to high-teens percent, both are coming off the steep inventory correction and/or base of 2023. Having said that, we continue to expect 2024 to be a healthy growth year for TSMC.

My take is all these other industries like phones and automotive are decreasing while AI demand is increasing. From TSM’s perspective they lowered their forecasts because automotive came in so much lower than the expected.

ASML is a company which is provider of photolithography equipment used in the manufacturing of semiconductor chips. Their tools etch circuit patterns onto silicon wafers. EUV - extreme ultraviolet lithography, is one of their best tools. The supply chain goes like,

ASML tools → enable more chips → SMCI uses to build

Basically, they are a tooling company for semis, in a similar business to Aehr. Semi manufacters come to them to purchase tooling. Interesing in this business they keep referring to being in a recovery already, as if the industry was already in a downturn.

Next looking into ASML earnings,

Q1 guides/actual
Guided revenue 5-5.5B, actual 5.29
Installed base sales 1.3B, actual 1.324
Gross margin 48-49%, actual 51%

Q2 guide
Revenue 5.7 - 6.2B
Installed base sales 1.4B
Gross margin 50-51%

Notes from the call April 17,

  • New CEO this Q, old one retired after 25 years
  • Net income was 1.2B EUR (all numbers in Euro)
  • Planned capacity ramp in preparation for stronger demand next year
  • Slow start to Q1 “is consistent with with our guidance and expectations coming out of downturn”
  • We see a similar environment as communicated last quarter with demand momentum from AI-related applications
  • “We expect an industry recovery over the course of 2024”
  • We expect 2025 to be a strong year
  • "The industry expects to be in the middle of a cyclical upturn in 2025
  • Preparing for all the new fabs being built worldwide, many supported by governments
  • Fabs are spread geographically and are strategic for customers
  • “If you look at the intake in the past couple quarters and also in the past quarter, it’s pretty clear that there’s a few usual suspects absent in the order intake”
  • Healthy part of order intake is related to China, strong sales in China this year
  • Sequentially though China revenue went from 2.2 → 1.9B, “it’s gone down a bit, but still strong”
  • Perspective is that the market is in recovery
  • “Foundry customers are still digesting”
  • Lead times are very long, very transparent company on revenues and plans
  • Best EUV tool on market
  • High performance compute will see growth
  • Huge productivity gains from new AI chips, analogy to next generation transitors
  • Need to update the grid, solar panels, and renewables
  • “Greenshoots” in the memory market

Sounds like ASML is prediticting very strong demand, if they can already see into 2025 and say it will be a very strong year. Also they highlight that AI demand is accelerating while some other categories are seeing more troubles.

My take is that the AI demand still looks strong. Some industries such as automotive chips saw a huge downturn, this in turn forced the companies have to lower overall guide numbers for the entire industry because they had growth priced into their models for automotive, and to a lesser extent mobile phones, and traditional CPU based computing.


Adding the results of ARM from February 7 to see what they said about their current prospects and next quarter. It sounds like they are projecting a very strong Q4 (their next quarter), led by AI.

Arm’s business model is quite a bit different than other semiconductor manufacturers. They license their chip designs and do not produce chips themselves.

From their latest call,

  • The more hardware that exists on ARM, the more software gets written, and works in a cycle
  • Growth driven by a number of factors and the growth is long term and sustainable
  • v9 product gets 2x the royalty rate of previous gen v8
  • “We are also seeing strong momentum and tailwinds from all things AI
  • More and more AI is running on more edge devices and end devices, and that’s all running on ARM
  • Very strong set of tailwinds for our licensing growth
  • End customers for new designs are needing more and more ARM technology to keep up, particularly with the AI demands
  • Growth driven by v8 to v9, all things AI needing energy efficient compute
  • “We feel very, very strongly positioned for growth”
  • Guiding for a range of 850 to 900M, represents a raise over 95M compared to prior implied guide
  • 35% of ARM business comes from smartphones which is has benefitted from smartphone recovery
  • Seeing more revenue growth from share gains and market share outside of mobile
  • Demand for our latest technology remains high as customers need access to AI capable CPUs
  • “In summary, we had an outstanding Q3 and expect our momentum to accelerate through Q4 and beyond
  • Customers focused on accelerated compute and AI and the requirements for more compute
  • We’re seeing demand for incorporating CPUs with anything that helps AI acceleration such as vector extensions
  • Largely under contract for next year on royalties, feel good about those trends
  • “We’ve definitely had some upside from AI and selling additional licenses that were just not in our plan and not anticipated
  • Sales cycle is shorter than normal, “so I’d say stay tuned, very hot. In 90 days, we’ll give you a better view
  • Strength in ARM China, now up to 25% revenue form 20%
  • Increased market share gains across the board for products, particularly around automotive and infrastructure/data center
  • There’s definitely growth coming from the data center side
  • We are seeing more and more AI demands in the data center whether it’s training or inference
  • With Gemini Nano and Galaxy S24, increased AI workloads are being pushed to the phone
  • More and more AI technology being pushed into phones that are AI capable and AI ready “because this field is moving very, very fast”
  • People are trying to put as much v9 technology into the smartphone to capture the AI wave
  • “We are thrilled about Q3, and we’re very, very excited about Q4

From the looks of it ARM is growing a lot from AI demand and talking a lot about how much they are growing from AI.

No word at all about any AI slowdown, and seems they are already hinting at their next quarter being a blowout.