Latest for Chip Giant Points to End of Tech Selloff

You want the good news or the bad news?

I should probably deliver the good news first, since studies show we only really remember the bad news, anyway.

The world’s largest chip foundry, Taiwan Semiconductor Manufacturing Co. TSM (TW:2330), has just reported its sales for the month of August. They’re up 33.0% year on year, taking the year-to-date increase to a similar amount, up 30.8% from January 2023 through August 2023.

Now, we shouldn’t read too much into one month of numbers. But to me, the strong showing in August demonstrates that the selloff in Nvidia NVDA and other U.S. tech stocks is unlikely to be sustained. TSMC is a major supplier to the likes of Nvidia and Apple AAPL, so where its sales go, those companies are likely to follow.

The bad news, particularly for tech investors on Wall Street, is that sales were down 2.4% from July. It’s this slight easing in TSMC’s sales and NVDA’s revenues that has prompted a bunch of weeping and gnashing of teeth.

But let’s not forget, business is very, very good for Nvidia. It is making billions of dollars. It is not a flash-in-the-pan Pets.com that doesn’t have profits and has seen a share-price escalation based on a concept more than delivery.

TSMC is equally real in its sales and income. This is a very big business where business is very good.

TSMC commands a market share of around two-thirds of the market for the physical production of chips (61.7% of the chip foundry business at last count, to be precise), a share that has only been increasing. Second-place Samsung has just an 11.0% share, while the leading U.S. chip producer, GlobalFoundries GFS, has seen its share slip from 5.8% to 5.1%.

Despite the Biden administration’s efforts to boost U.S. chip production through subsidies and tax breaks, GlobalFoundries has slipped down the pecking order behind United Microelectronics Corp. UMC (TW:2303), also based in Taiwan, and mainland China’s top chip hope, SMIC HK:0981. Those two companies both hold a 5.7% market share.

Any way you cut it, TSMC is performing at a very high level, and has done so for years. It was my stock recommendation in Asia for the year, and despite a selloff in July, is still producing the goods, quite literally, up 68.7% year to date.

Analysts are saying that there’s now a good chance that TSMC will exceed earnings estimates for Q3. So they’re expecting it to do better than expectations. It’s a bit of a tautology, but it’s only the fact that Nvidia didn’t do even better than it was expected to do that has dented the stock.

Nvidia shares may well have gotten ahead of themselves. The magnitude of its market selloff this time last week, after it reported earnings that were only really really good, has been magnified by the heady gains in the stock. I see it as a short-lived and likely necessary correction that doesn’t change anything about prospects for Nvidia and TSMC.

The TSMC numbers, to me, indicate that there’s strong and sustained demand for these highest-end chips. TSMC is making more than half its sales from semiconductors for high-performance computing, linked to demand in artificial intelligence (AI).

TSMC shares ended up 0.6% in Taipei on Tuesday after reporting the August sales, outstripping the broader Taiwan market, which fell 0.4% for Tuesday. It’s been a sideways day for Asian markets, little in the way of strong moves amid Wall Street’s choppy volatility.

Exports out of Taiwan hit an all-time monthly high of $43.6 billion for August, Taiwan’s finance ministry said on Monday. The 16.8% leap for the month far exceeded the 7.4% growth forecast by economists in a Reuters poll, and the 3.1% rise in July.

It’s the tenth-straight month that exports have risen, and the growth clearly shows no sign of abating. The ministry, which forecasts growth of 5% to 9% in September, attributes the strong run to sustained demand for AI and high-performance computing, with a “gradual upward slope” likely to continue through the second half of the year. The third and fourth quarters normally see higher demand as companies in the West build toward Christmas and the holiday shopping season.

Exports to the United States are particularly strong, up 78.5% in August to a record high of $11.9 billion. On the flip side, sales to China are lagging, up 1.0% in August, although that at least did arrest the 13.5% decline they saw in July.

TSMC is now under the guidance of C.C. Wei, who in June added the title of chairman to his CEO role. The company been looking to expand away from its previous heavy concentration on production in Taiwan. It is progressing with its $65 billion project to build three fabs in Phoenix, where it is due to start making its highest-end chips starting in 2025. It is now mulling a third fab in Japan, where it opened its first fab this February and is planning on a second, and broke ground three weeks ago on its first European production center, in Dresden.

Those facilities will bring chip production close to customers and also ease concerns over any attempt by mainland China to blockade self-governing Taiwan, which it would like to seize. The company is doing its best to weather the geopolitical winds, but remains exceptionally well-positioned in terms of its niche, and expertise at producing the best chips you can make.

At the time of publication, McMillan had no positions in any securities mentioned.