How Apple's Suppliers Stand to Benefit from Samsung's Woes

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Part 7
How Apple's Suppliers Stand to Benefit from Samsung's Woes PART 7 OF 11

What TSMC’s Inventory Says about Apple’s iPhone 7 Demand

TSMC’s inventory reflects the iPhone 7’s future demand

In the previous part of this series, we saw that TSMC (TSM) reported a record-high profit and strong revenue in fiscal 3Q16 on the back of strong orders from Apple (AAPL). This was also visible from the foundry’s inventory.

As seen in the graph below, the foundry increased its inventory in fiscal 2Q16 as it started preparing for the bulk order for A10 processors it received from Apple. According to a report by Taiwan’s Economic Daily, Apple asked its Taiwan-based suppliers to manufacture components for 72 million–78 million iPhone 7 units in 2016. That’s 15% more than the analysts’ estimate of 65 million units.

What TSMC&#8217;s Inventory Says about Apple&#8217;s iPhone 7 Demand

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In fiscal 3Q16, TSMC’s inventory decreased 11.2% sequentially to $1.7 billion, indicating that the foundry shipped the A10 processors stocked in its inventory.

Inventory correction likely in fiscal 4Q16

However, an inventory correction is likely to occur in fiscal 4Q16 as the holiday season ends. The degree of correction depends on the end-consumer demand.

As we saw earlier in this series, Apple accounts for most of TSMC’s revenue growth. TSMC’s inventory correction would help determine the extent to which the demand for the iPhone 7 could fall in 1Q17. In the company’s fiscal 3Q16 earnings call, TSMC’s co-CEO, Mark Liu, stated, “The previously anticipated inventory reduction at the end of Q4 will be mild… We see end-market demand is still healthy.”

Even Intel (INTC) is likely to report a slight decline in inventory as it ships its processors to PC makers.

TSMC’s high capital expenditure

On the cash front, TSMC’s operating cash flow increased 18.6% sequentially to $4 billion in fiscal 3Q16 as its revenue and profit rose in dollar terms. However, its cash reserves fell by $3.4 billion to $18 billion at the end of fiscal 3Q16. This is because the foundry is investing heavily in the production ramp-up of the 10nm (nanometer) technology.

You can invest in the semiconductor supply chain through the VanEck Vectors Semiconductor ETF (SMH), which has holdings in 26 semiconductor stocks, including ~15.8% in INTC and ~15.3% in TSM.

Next, we’ll look at TSMC’s guidance and see whether iPhone 7 demand can continue to grow in fiscal 4Q16 and fiscal 1Q17.


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