NVIDIA, not Taiwan Semiconductor Manufacturing, may get most of the AI booty this year.
Investors are flocking to TSMC stock (NYSE:TSM) as a way to benefit from rising demand for artificial intelligence chips. But now, Wall Street analysts are telling customers to temper their expectations. TSMC’s exposure to AI trends this year could be limited.
Last week, TSMC shares surged 12% in a day after Nvidia (NVDA) released a much better-than-expected earnings forecast for the July quarter. Nvidia uses a Taiwan-based foundry to manufacture all of its cutting-edge AI semiconductors.
JP Morgan analyst Gokul Hariharan warned Wednesday that only about 5% of TSMC’s revenue in 2023 will come from AI.
“Given that AI exposure is still very small … TSMC’s EPS upgrade is unlikely in 2019 as demand improvements in other areas remain very sluggish. [the second half of 2023],” he wrote.
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Even though TSMC owns all of Nvidia’s AI business, the analyst said he expects the company to sell only 1.6 million to 1.8 million units this year. Hariharan noted that Nvidia sells its AI chips at a much higher price than it pays TSMC for manufacturing and packaging.
Another problem is that TSMC is very dominant in the third-party chip manufacturing business, with around 59% market share, according to TrendForce. It’s too big to escape the overall semiconductor slump.
There’s no evidence that TSMC’s main end markets, smartphones and PCs (which accounted for 34% and 44% of Q1 revenue respectively), will recover anytime soon. TSMC had some months last year when its sales were up more than 60% year-over-year, but it began reporting double-digit sales declines in March and April, and the last two months have been reported to be optimistic for the economy. The downturn means it could continue.
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“NVIDIA is the leading AI processor provider and TSMC is the sole foundry supplier for these chips, but their contribution is diluted by TSMC’s broader customer base,” said Bernstein analyst Mark Lee. wrote on thursday.
Lee also predicted that the share of AI in TSMC’s revenues would be in the low single digits in the near future. The analyst said NVIDIA creates more value beyond hardware by providing the most comprehensive set of software tools and programming platform he ecosystem.
Email Tae Kim (tae.kim@barrons.com).
