Taiwan Semi’s October Revenue Surge Dampened by Fresh China AI Restrictions

Late last week, Taiwan Semiconductor TSM published its October revenue report, and what we saw tells us demand for the company’s chips powered ahead during the month. Sequentially, TSM’s October revenue soared 25% higher to ~$9.7 billion equating to just over a 29% year-over-year increase. 

Typically, TSM’s October revenue is one of the highest revenue months of the year as companies order and ship for new product introductions and the holiday shopping season. Over the 2020-2023 period, the company’s October revenue has accounted for 34% of its December-quarter revenue. This year, the October revenue booked accounts for 36%-37% of TSM’s $26.1 billion-$26.9 billion revenue guidance for the current quarter. Depending on your perspective, this should give some confidence and cushion for that forecast, or it could suggest that TSM’s guidance could be a tad conservative.

Fresh Biden Administration Restrictions

Taking some of the wind out of that very positive report, Monday morning TSM was ordered by the Biden administration to stop shipping advanced chips used in artificial intelligence applications to customers in China. According to the report, the Commerce Department sent a letter to TSM that imposed restrictions on the export of 7 nanometers or more advanced designed chips. Reports indicate that TSM informed its affected clients that it would be suspending the chip shipments.

TSM’s China Exposure

In TSM’s Q3 2024 presentation, we find that those advanced geometries (7 nanometers and less, which includes 5 and 3 nanometers) accounted for 69% of TSM’s revenue, up from 59% in Q3 2023. However, when we look at TSM’s geographic breakdown, per the data furnished with the SEC, China accounted for 10%-12% of total revenue across all reporting segments over the last few years. It would be logical to assume that figure is somewhat higher this year given AI demand. 

That demand could also mean that TSM’s October revenue was as strong as it was as China firms pulled forward shipments in anticipation of another round of restrictions. Our thinking on this stems from a late October report, in which the Biden administration said it was finalizing rules to curb AI investments in China.

Our Question and Potential Answers

In recent weeks, we’ve learned that Microsoft MSFT, Amazon AMZN, Alphabet GOOGL, Meta META, and others continue to ramp capital spending, and both the smartphone and AI PC markets are growing. What we don’t know as yet is how much of TSM’s revenue stream from China was for those advanced geometries. Clues for that could be had in the coming days when Nvidia NVDA reports its quarterly results on November 20. Later this week when Applied Materials AMAT reports, we’ll see if there are any incremental implications for semi-cap equipment.

As these answers come together, we’ll assess the fallout on our Nvidia and Marvell MRVL shares. As a frame of reference, Nvidia’s total China revenue exposure was ~11% over the last two reported quarters, down from 20% over the same period in 2023.

It’s a bit more complicated with Marvell, which does not report its revenue based on the geographic location of its end customer. As such, while Marvell’s filings show around 46% of its revenue from the last two quarters is from China, the footnote below that data states “a substantial majority of the shipments made to China relate to sales to non-China based customers that have factories or contract manufacturing operations located within China.” While Nvidia’s comments will help paint a picture, we expect questions to Marvell about its China exposure on its December 3 earnings call.

Near-term, the uncertainty over the net exposure to China for these advanced chips will be an overhang on NVDA and MRVL shares, and we’ll let the market absorb that as we dig further into that exposure.

At the time of publication, TheStreet Pro Portfolio was long NVDA, MRVL, MSFT, AMZN, GOOGL, META and AMAT.