Jan 18, 2023
The Semiconductor Bottom Is Approaching: Why Warren Buffett Bought TSMC
Ryunsu Sung
On January 13, TSMC (TSM) announced its Q4 2022 earnings. Due to the semiconductor downturn that began at the end of the quarter, revenue came in slightly below guidance, but gross profit (selling price minus cost) slightly exceeded guidance.
For the first quarter, TSMC guided for a mid- to high-single-digit percentage decline in revenue, and projected its gross margin to fall 8 percentage points from the peak of 62% to 53%.
However, it forecast that full-year 2023 results will slightly surpass those of the previous year, thanks to expectations that the second half will be nearly 30% better than the first half. In other words, TSMC expects the bottom of the semiconductor cycle to occur in the first half of this year.
For the full year of 2023, we forecast the semiconductor market, excluding memory, to decline approximately 4% while foundry industry is forecast to decline 3%. For TSMC, we expect 2023 to be a slight growth year for TSMC in U.S. dollar terms.“For 2023, we expect the semiconductor market excluding memory to decline by around 4%, and the foundry industry to decline by around 3%. For TSMC, we expect revenue in U.S. dollar terms to grow slightly year over year.”
This was the company’s comment on the earnings call.
The outlook that TSMC’s revenue will edge up even as the overall market and the foundry segment it belongs to contract slightly effectively means the company expects to capture additional market share.
Given that TSMC is already the dominant player in the foundry industry (with a 60% share in Q4, versus Samsung Foundry’s 13%), the expectation of further share gains likely reflects the fact that it has secured orders in the HPC (High Performance Computing) market that surpass Samsung Electronics.
For reference, the main process node used in the HPC market is currently 5nm, and chipsets using the 3nm process are expected to begin rolling out this year.
Apple (AAPL), Qualcomm (QCOM), AMD, and Nvidia (NVDA) are among TSMC’s key customers for its HPC processes.
In other words, the odds are very high that Samsung Electronics’ foundry business will fail to seize the lead even in the next-generation 3nm process.
Looking at Q4 revenue by platform, the decline in the DCE (Digital Consumer Electronics) segment was particularly steep, and despite having taken over Qualcomm’s production volume (Snapdragon 8 Gen 1+) from Samsung Electronics, we can see that the smartphone segment also fell by about 4%.
However, it is also plausible that the drop in smartphone revenue was partly driven by production disruptions for Apple’s iPhone 14 Pro models.
HPC, which accounts for 42% of total revenue, grew 10% quarter over quarter. Even as overall semiconductor demand declines, it is clear that demand for high-performance computing remains very strong.
This appears to be closely aligned with the reason Warren Buffett’s Berkshire Hathaway (BRK) bought TSMC. TSMC’s moat in high-performance semiconductor manufacturing is extremely powerful, and that is worth underscoring.
Meanwhile, there are signs that the inventory overhang in consumer semiconductors is gradually being resolved.
Nvidia’s RTX 3080 graphics card soared to as high as about $2,000 in 2021, then formed a bottom around October this year, after which secondhand prices have rebounded slightly.
Following Ethereum’s transition to PoS (Proof of Stake), it appears that at least part of the oversupply has finally been worked off.
According to TSMC, inventories of consumer semiconductors (PCs and smartphones) peaked around Q3 2022 and are now being drawn down rapidly.
However, if you listen to Micron, you can see that this time there is far too much inventory of data center semiconductors piling up.
In particular, it appears that the inventory is concentrated in memory semiconductors.
Now on the data center side… So there has been a reduction in the growth in data center for 2023 due to some of these end market challenges. And I think whereas segments like PCs and smartphones have entered the inventory correction earlier in calendar ’22, data center has been relatively late in entering that inventory correction. So in terms of purchased DRAM and NAND bits in 2023 calendar year, there is a pretty significant impact coming in the data center due to a fairly high level of inventory of DRAM and NAND in data center customers entering 2023 calendar year.
“Now, turning to data centers… We expect data center growth in 2023 to slow due to issues in the end markets (enterprise customers such as Meta, Google, and Microsoft). PCs and smartphones began inventory corrections in early 2022, but data centers only entered their inventory correction phase after some delay. As a result, in 2023, demand for DRAM and NAND will likely see a major hit to new orders because data center customers are entering the year with very high inventory levels.”
In other words, while inventory adjustments for consumer electronics such as PCs, smartphones, and game consoles began in the first half of 2022, inventory correction for data centers was significantly delayed. This was because U.S. big tech companies experienced an unexpectedly sharp slowdown in growth and,
1) were unable to work through the volumes they had ordered within the planned timeframe,
2) and cut back new capex (capital expenditures) in preparation for a recession.
In the course of this, it implies that the demand overhang for data center memory semiconductors could persist throughout 2023.
Therefore, the semiconductor market in 2023 is likely to show a broad-based contraction in the first half, but in the second half we can expect a recovery in demand for non-memory semiconductors, especially for HPC and for semiconductors used in consumer electronics.
That means the recovery in the memory semiconductor cycle—where Samsung Electronics and SK Hynix, the semiconductor names most favored by Korean investors, are positioned—is likely to come later than the market currently expects.
Three-line summary:
- TSMC expects a rebound in the semiconductor cycle in the first half of this year.
- Consumer semiconductor inventories are being worked down quickly.
- It will likely take time to digest data center memory semiconductor inventory.
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