Shares of Taiwan Semiconductor Manufacturing (TSM) took a beating Thursday as the world's largest contract chipmaker topped analyst estimates for the second quarter but disappointed with its outlook. TSM stock fell more than 5% and dragged other chip players down with it.
XTaiwan Semiconductor, better known as TSMC, earned $1.14 per U.S. share on sales of $15.68 billion in the June quarter. Analysts polled by FactSet had expected earnings of $1.07 a share on sales of $15.44 billion. However, TSMC earnings fell 25% year over year while sales dropped 12%. In local currency, earnings decreased 23% while sales declined 10%.
TSMC's results marked its second straight quarter of declining sales and earnings as its customers navigate a downturn in chip demand.
For the current quarter, TSMC predicted revenue of $16.7 billion to $17.5 billion. The midpoint of $17.1 billion is below Wall Street's target of $17.4 billion. In the year-earlier period, TSMC generated $19.2 billion in sales.
TSM Stock Falls After Report
Taiwan Semiconductor also cut its revenue forecast for the full year to a 10% decline from a mid-single-digit decline.
"This is the third cut to its revenue outlook that TSMC has made this cycle," Needham analyst Charles Shi said in a note to clients. Shi had expected TSMC to reduce its 2023 sales outlook to a high-single-digit decline.
"TSMC's second-quarter earnings call may go down as one of the more pessimistic calls in recent history," Shi said.
In afternoon trading on the stock market today, TSM tumbled 5.1% to 97.77.
TSMC's earnings report pulled down a host of semiconductor stocks. The Philadelphia semiconductor index, known as SOX, sank 2.7% on Thursday. The SOX includes the 30 largest semiconductor stocks traded in the U.S.
Among major TSMC customers, Advanced Micro Devices (AMD) fell 3.8% in afternoon trades and Nvidia (NVDA) retreated 2.3%.
TSM stock is in a flat base with a buy point of 110.69, according to IBD MarketSmith charts.
Factors Behind Soft Demand
"Our second-quarter business was impacted by the overall global economic conditions, which dampened the end-market demand, and led to customers' ongoing inventory adjustment," Chief Financial Officer Wendell Huang said in a news release.
He added, "Moving into third quarter 2023, we expect our business to be supported by the strong ramp of our 3-nanomenter technologies, partially offset by customers' continued inventory adjustment."
Circuit widths on chips are measured in nanometers, which are one-billionth of a meter.
The slower-than-expected economic recovery in China also is a factor in TSMC's reduced outlook, Evercore ISI analyst C.J. Muse said in a report.
In addition, the chip inventory correction now is likely to last through the fourth quarter, rather than the third quarter as previously expected, Muse said.
Taiwan Semi Getting AI Boost
Taiwan Semiconductor produces chips for fabless semiconductor firms such as AMD, Apple (AAPL), Broadcom (AVGO), Nvidia and Qualcomm (QCOM).
Cyclical headwinds overshadowed strength in AI chip production at TSMC in the second quarter, Needham's Shi said.
TSMC management expects chips for artificial intelligence to grow to a low-teens percent of sales by 2028 from 6% today.
"Management still sees Q3 as the end of an inventory correction but believes customers may not build inventory back as fast as previously expected," Shi said.
TSM Stock On Tech Leaders List
Wedbush Securities analyst Matt Bryson kept his outperform rating on TSM stock despite the company's disappointing outlook.
"While we believe this deterioration in outlook wasn't unexpected, the magnitude of the downtick was more significant than we had anticipated heading into earnings," Bryson said in a note to clients.
TSM stock ranks sixth out of 30 stocks in IBD's semiconductor manufacturing industry group, according to IBD Stock Checkup. Taiwan Semiconductor has an IBD Composite Rating of 92 out of 99. IBD's Composite Rating is a blend of key fundamental and technical metrics to help investors gauge a stock's strengths. The best growth stocks have a Composite Rating of 90 or better.
Further, TSM stock is on the IBD Tech Leaders list.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
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