TSMC Throws Down a $40B-$44B Gauntlet, Far Surpassing Intel And Samsung
TSMC is the world’s leading foundry, and they are making sure it stays that way. Intel and Samsung initiated quite ambitious plans last year that would take their spending on logic semiconductor fabs to $25B+ a year. Alongside these aggressive spending plans, Intel and Samsung pushed roadmaps that would take them to leadership performance, power, and density. TSMC puts ceiling on their ambitious plans.
TSMC believes the semiconductor industry will grow at 9%. Their forecast foundry growth at 20%, but they project TSMC’s growth to be at 25%-29%. Intel’s own projections have them basically flat on revenue, and Samsung isn’t growing too fast due to DRAM pricing dynamics.
TSMC’s plans for 2021 were $25B to $28B, but total spend ended up coming in at $30B. With 2022, this number was expected to be in the $30B to $35B range, but instead TSMC stated they would spend $40B to $44B on expanding capacity. Intel and Samsung are going to have a hard time keeping up with the sheer scale that TSMC is planning for. On the technology front, TSMC continues to reiterate they will maintain leadership power, performance, area, and transistor technology in the industry.
The large increase over the consensus Wall Street estimate doesn’t come as a surprise to SemiAnalysis. We have discussed this aspect in the past, but in short, TSMC started accepting prepayments for capacity since Q3 of 2021. These prepayments are for increases in capacity that customers want beyond TSMC’s plan. This capacity that customers demand necessitates further expansions beyond the $30B to $35B range and so TSMC wanted upfront cash in order to follow through.
In total, TSMC has collected $6.7B of prepayments over the last 6 months and they will continue to collect more. This trend isn't slowing down. If anything it is accelerating. These prepayments almost pay for the entire increase in fab spending.
As mentioned in the Intel TSMC wafer supply agreement article, different customers have different preferential treatment, but this treatment is fair based on exclusivity terms. Nvidia alone contributed to more than $3B of these prepayments to TSMC, with some of their prepayments also going to packaging and test firms.
We entered into several long-term supply agreements, under which we made advance payments of $1.64 billion this quarter and will make future payments of $1.79 billion. Outstanding inventory purchase and long-term supply obligations were $6.90 billion, inclusive of the $1.79 billion, up from $2.57 billion a year earlier and up from $4.79 billion in the prior quarter.
Colette Kress – Nvidia CFO
With this huge capacity expansion also comes some margin expansion. TSMC projects over 53% long term gross margins. This is material increase over the prior guidance which were over 50%. Morgan Stanley continues to look idiotic given they claimed TSMC would fall under 50% margins in late 2021 / early 2022 and that TSMC had no price pressure. In regards to margin, TSMC also stated N5 continues to be below the current corporate average, but as the technology matures it will reach the higher margins of their older technologies.
TSMC derives more than half their revenue from 7nm and 5nm technologies, areas that only 2 other players can even dream of ever competing in. In addition, both Intel and Samsung have had major stumbling blocks and worse node performance, power, and density in comparison. Of the gargantuan $40B to $44B capital expenditures being planned for 2022, 70% to 80% will be allocated for 7nm, 5nm, 3nm, or 2nm. 10% will be spent for masks and advanced packaging such as CoWoS, SoIC, and InFO. The last 10% to 20% will be spent for specialty and legacy technologies, with CMOS image sensors and RF being two standouts.
All this growth has caused TSMC’s total wafer shipments to skyrocket form less than 10.5 million 12” equivalent wafers shipped in 2016 to more than 14.1 million 12” equivalent wafers shipped in 2021. The more impressive trend is the pricing power of these wafers that TSMC is adding. The average selling price has skyrocketed due to the increase in mix on the leading edge and with specialty technologies. The chart above is raw revenue/wafers and doesn't account for packaging and mask making revenues. More recently, trailing edge wafers have also received price increases. This trend looks to hold steady and not be transitory for the medium term despite TSMC trying to talk down their price increases on the legacy nodes.
We are continuing to work closely with our customers to support their growth, and our pricing strategy will remain strategic not opportunistic to reflect our value creation.
TSMC Q4 2021 Earnings Call
While automotive is the largest growth sector on a percentage basis, HPC is the largest growth sector on an absolute dollar basis. The HPC category that TSMC names covers all sorts of processors, all the way from Apple’s M1 to AMD CPUs and Nvidia GPUs to networking switch ASICs and NICs. It is an incredibly broad category that will continue to be the backbone of growth as Nvidia, AMD, and in-house hyperscaler efforts blossom into full-fledged market dominance. TSMC had some interesting comments on Arm.
ARM is a new phenomenon. I think the CPU architecture no longer been dominant by 1 architecture. Multiple architecture provided their better integration with software, provide a much wider application of CPUs. And that no matter what the CPU, which architecture they are, currently, we are engaging to all CPU architecture customers.
TSMC Q4 2021 Earnings Call
Moving onto the N3 technology which has had some bumps its development. It is the first major TSMC node with a greater than 2 year gap since 28nm. TSMC continues to reiterate there will be shipment in the beginning of 2023, so this is a 2.5 year gap versus N5. TSMC also continues to reiterate they have more tape outs on N3 than they did on N5 in the same timeframe, and the answer why is obvious given what Apple, Intel, and other customers are doing in the midst of the semiconductor design renaissance.
Let me emphasize that we always operate in a good phase and support all our customers opening and fairly. And the IDM customer has been the same. That's also that TSMC's good customer. We also understand that the IDM customer has their own plans for future insourcing, and we already have taken this into our capacity planning consideration.
Our capacity planning is based on the long-term market demand profile, underpinned by the industry megatrend of 5G and HPC and the semiconductor content enrichment in very end devices. And we do not depend on any 1 single customer or product.
TSMC Q4 2021 Earnings Call
TSMC made it quite clear that these huge expansions are solely due to Intel’s movement. Despite the details of their supply agreement, Intel isn’t a risky customer to take on and TSMC is playing the long game.
Despite massively increasing capex again, ASML EUV tool production is not increasing measurably. The recent ASML fire will not materially affect TSMC’s capex plans either. This is further proof to a point SemiAnalysis has been bringing up for a while now. This point is that wafer fabrication equipment spend intensity on lithography tools stops increasing after 3nm nodes. More spending will go to other tool vendors especially in deposition, etch, metrology/inspection, and advanced packaging related tools/testers.
TSMC’s stock will certainly raise due to this earnings call and the huge increases in expectations for capital expenditure and long-term revenue growth, but they aren’t the best stock to buy for this rally. Semiconductor capital intensity is increasing very fast.
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