Semiconductor Giants Fight Tense Headwinds

Second-quarter earnings reports of semiconductor component manufacturers have varied, with companies experiencing different results. One common theme, however, is the impact of China's economic outlook on stock prices.

ASML was the first company to report its Q2 earnings, beating earnings forecasts and even upgrading its guidance. Initially, the company's shares rose in response, but as investors analyzed the details of the earnings release, the share price turned around. Similarly, TSMC surpassed expectations but warned about its future sales projections, driving the stock price down almost immediately after the announcement.

ASML Shows Strength

ASML, the Dutch semiconductor equipment manufacturer, reported robust sales of €6.90 billion, exceeding the average forecast of €6.73 billion. Its Q2 earnings came in positive, with a gross margin of 51.3%, beating expectations with a considerable margin. The company's profit also saw a significant increase of 35% compared to the previous year, amounting to €1.94 billion.

The sales of ASML fell by the bans on exporting advanced chip systems, but they partly compensated by increased demand for older deep ultraviolet (DUV) systems. The more advanced extreme ultraviolet (EUV) systems faced restrictions in export to China, but companies like TSMC and Intel were not yet ready to receive them in their factories. Consequently, ASML witnessed a backlog of €38 billion, leading to an expansion of its manufacturing equipment production to meet the demand for older systems.

ASML announced it plans to distribute an interim dividend of €1.45 per ordinary share on August 10, 2023 and has engaged in share buybacks, repurchasing approximately €500 million worth of shares in the second quarter.

AI Demand Insufficient

Taiwan-based chip manufacturer TSMC faced a 23% decline in profits, amounting to 181.8 Taiwanese dollars, marking the first profit drop over four years. Although the figure exceeded the consensus forecast of 172.5 billion Taiwanese dollars, investors were concerned about signs of falling semiconductor demand.

TSMC's profitability is projected to worsen in the coming year, with a declining gross margin and a cut in revenue projections for the entire year to -10%. The company's CEO, C. C. Wei, highlighted the strong demand for AI but said it was insufficient to offset economic weaknesses and other end-market challenges.

Additionally, the slower-than-expected recovery in China impacted TSMC's sales outlook. Delays in starting production at its Arizona plant due to labor shortages and rising costs further added to their challenges.

Looking ahead, TSMC anticipates support from its 3-nanometer technologies in Q3 2023, albeit partially offset by ongoing customer inventory adjustments. Q2 saw shipments of 5-nanometer accounted for 30% of total wafer revenue, while 7-nanometer for 23%. Advanced technologies, including 7-nanometer and more advanced technologies, contributed 53% of total wafer revenue.

ASML's key market is China, but it has never exported its most advanced EUV fab machines there due to control rules. Recent regulations limiting China's access to advanced chip technology also impacted some second-best DUV models. Nevertheless, ASML's CEO remains optimistic as Chinese customers purchase other available machines. However, he cautioned that customers exercise caution amid an uncertain recovery outlook.

TSMC heavily relies on China for growth, but the company's outlook is less optimistic. It expects a milder seasonal jump in the year's second half, unlike in previous years when Apple launches new iPhones ahead of the holiday season.

TSMC also faces cost challenges, particularly in energy prices and the slower ramp-up of its N3 technology. To prepare for this eventually, TSMC said it would be spending towards the lower end of its $32-36B capital expenditure plan.

Despite beating analysts' forecasts, ASML and TSMC confront challenging environments due to slowing demand for chips. TSMC's revenue forecast was cut due to production delays at its new factory, while ASML faced weakness in its most advanced technology products, partly influenced by customer readiness.