After the opening of the US stock market today, Taiwan Semiconductor's stock price soared more than 13%, reaching $210, hitting a historical high, and its market cap returned to one trillion dollars. So, what is the outlook for the global semiconductor industry?

Third quarter performance exceeds expectations

TSMC announced its performance, showing that the company's revenue in the third quarter of this year was about NT$759.69 billion, a year-on-year increase of 39.0%, an increase of 12.8% quarter-on-quarter; net income after tax (net profit) is about NT$325.26 billion, exceeding the market estimate of NT$299.3 billion, a year-on-year increase of 54.2%, with a quarterly increase of 31.2%; earnings per share is NT$12.54 (equivalent to $1.94 per American depositary share), a year-on-year increase of 54.2%.

When calculated in US dollars, Taiwan Semiconductor's third-quarter revenue was $23.5 billion, a year-on-year increase of 36.0% and a quarter-on-quarter increase of 12.9%. The gross margin for the third quarter of 2024 was 57.8%. In addition, Taiwan Semiconductor expects fourth-quarter sales to be $26.1 billion to $26.9 billion, exceeding the estimated $24.94 billion; with an expected gross margin of 57% to 59%, also surpassing the estimated 54.7%.

After the performance release, Taiwan Semiconductor's Chairman Wei Zhejia stated at the earnings conference that the capital expenditure for 2024 will be slightly higher than $30 billion, previously expected to be $30 billion to $32 billion, and 2025 capital expenditure is likely to be higher than this year. Wei Zhejia stated that higher capital expenditure always brings higher growth opportunities, and the growth in the next five years will also be "healthy".

Regarding the current market demand for artificial intelligence, Wei Zhejia expressed optimism. He mentioned that AI demand is real, overall chip demand is stabilizing and improving. Demand is just beginning, one key customer of the company also mentioned that the current demand is "crazy and just getting started," and will continue for several years.

Wei Zhejia expects that in the 2024 fiscal year, revenue growth related to AI processor servers will more than triple and account for 15% to 19% of total revenue. At the same time, the expected growth in total revenue has been raised from the previous 20% to 24% to 30%.

Wei Zhejia also responded to the rumors of acquiring Intel. He stated that there is no intention to acquire Intel's wafer fab, and he is not interested in acquiring Intel's wafer fab.

Taiwan Semiconductor's overseas factory construction is still ongoing. The company will build a second factory in Kikuyo-cho, Kumamoto Prefecture. The operating subsidiary JASM's president, Yuichi Horita, stated that the new factory is planned to start construction this year and start production in 2027. The second factory will be located to the east of the first factory and is planned to produce 6 to 40 nanometer chips along with the first factory.

Due to the successive online of wafer fabs, Wei Zhejia expects gross margin dilution of 2% to 3% in 2025. Nevertheless, he emphasized that next year will still be a year of healthy growth, and utilization rate will also be positive.

Entering October, Taiwan Semiconductor's stock price has been on a continuous rise recently, with a monthly increase of 8.15%. At Thursday's close, Taiwan Semiconductor's stock price in the Taiwan stock market was NT$1035, a slight decrease of 0.96% for the day, but not far from the historical high of NT$1075. In the US stock market, Taiwan Semiconductor's stock price has also shown a sharp trend. With a 7.95% increase in October, it hit a new high of $194.25 this Monday. In pre-market trading on October 17, Taiwan Semiconductor's stock price exceeded $200, setting a new historical high.

Why did ASML "burst the bubble"?

Unlike Taiwan Semiconductor's impressive performance and stock price, lithography equipment manufacturer ASML's financial report caused the company's stock price to plummet significantly for two consecutive days, sparking increasing controversies over the prospects of the chip industry.

In fact, ASML's performance in the third quarter did not qualify as a "burst." The company's third-quarter revenue was 7.467 billion euros, up 12% year-on-year, an increase of 19.6% sequentially, slightly exceeding the previous guidance of 6.7 billion euros to 7.3 billion euros, with a gross margin of 50.8%, in line with previous guidance of 50% to 51%.

"Bursting the bubble" refers to the backlog of orders. The financial report revealed that the company's orders in the third quarter were 2.63 billion euros, a sequential decline of over 50%, below market expectations. At the same time, the company revised down its revenue guidance for 2025 to 30 billion euros to 35 billion euros (previously guided: 30 billion euros to 40 billion euros), with a median year-on-year decline of 7%.

HTSC analysts Huang Leping and Chen Xudong's report suggests that ASML has a high customer concentration, with EUV customers mainly including Taiwan Semiconductor, Samsung, and Intel as the three major production companies. Customers for mature process equipment are mainly semiconductor manufacturing companies in China. Downstream AI-related demands include: 1) HBM-related memory chips (Samsung, SK Hynix, Micron), 2) 2nm / 3nm-related advanced logic chips (Taiwan Semiconductor, Intel, Samsung). Analysts believe the downward adjustment is due to two reasons: weak global demand for consumer products such as phones and PCs, and investment slowdown resulting from Intel's strategic adjustment.

In the third quarter, ASML's mainland China revenue was 2.785 billion euros, up 14% year-on-year, a sequential increase of 19%, with mainland China accounting for 47% of the revenue, down 2% sequentially. ASML expects mainland China's revenue share to drop to around 20% next year. Based on the current median guidance, this implies a year-on-year decrease of about 59% in ASML's mainland China revenue by 2025.

HTSC analysts believe that due to pressures such as the tightening of US export restrictions, Chinese semiconductor foundries have been trending towards early equipment purchases over the past two years. This led to significant year-on-year growth in revenue from the six major global equipment companies in mainland China over the past four quarters. In the first quarter of this year, mainland China's revenue share hit a historical high of 46%. Looking ahead, mainland China is likely to enter a period of declining capital expenditure and steadily rising revenues in 2025.

What is the global outlook for the chip industry?

The data shows that global semiconductor sales in August increased by 20.6% year-on-year. The intense release of new machines in the fourth quarter is expected to make the semiconductor demand peak season very strong. According to SIA, global semiconductor sales reached $53.12 billion in August, a 20.6% year-on-year increase. China's sales in August were $15.4 billion, a 19.2% year-on-year increase, indicating a warming industry demand. Entering a period of intensive new machine releases in the fourth quarter, in October, with MediaTek and Qualcomm releasing mobile chips with enhanced AI capabilities, it is expected that major Android manufacturers such as VIVO, OPPO, Honor, Xiaomi, etc., will launch flagship phones equipped with the latest main chips, with the arrival of consumer festivals like Singles' Day sales and the recent promulgation of the "comprehensive incremental policy", semiconductor demand is expected to be very strong during the peak season.

However, the U.S. government may be about to implement sanctions related to High Bandwidth Memory (HBM) technology, aiming to restrict companies like Micron Technology, SK Hynix, and Samsung from supplying HBM chips to Chinese enterprises. In this context, for Chinese companies, accelerating the expansion of HBM-related industries and the domestic substitution of related equipment materials has become an urgent need. Driven by the strong momentum of global AI investment and the rapid development of HBM technology, the increased capacity demand for AI chips in HBM will further drive market growth.

Tianfeng Securities believes that the current semiconductor industry cycle is in a relatively low-level range of a long cycle. In the short term, entering the traditional peak season in the second half of the year, benefiting from factors such as the release of new flagship phones, consumer festivals like Singles' Day, it is expected that industry terminal sales will continue to grow on a month-on-month basis.

The report suggests that the market should focus more on innovative products on the demand side, prioritizing AI terminals accepted by consumers, which are expected to become new popular applications. In the long term, semiconductor blue chips are currently at a relatively low valuation level. Companies that continuously optimize operations and iterations are expected to achieve better market share and profit levels at the next cycle peak. In terms of innovation, it is expected that AI/satellite communications/MR will be major industry trends, and individual stocks in the industry chain are expected to continue to reflect thematic opportunities with the progress of technological innovation.

Editor/Lambor