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Why Did TSMC’s Shares Rise by 7.8% in Just One Day?

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TSMC posts strong fiscal 2Q16 earnings

The semiconductor industry is entering a seasonally strong quarter after two quarters of weakness. The first signs of improvement were reflected in the fiscal 2Q16 earnings of the world’s largest foundry, TSMC (TSM). The company reported better-than-expected fiscal 2Q16 earnings and even stronger fiscal 3Q16 guidance. The company’s shares rose by 7.8%, reaching a record high of $27.23 on July 14, 2016.

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Fiscal 2Q16 revenue

In fiscal 2Q16, TSMC’s revenue rose by 8% YoY (year-over-year) to $6.8 billion, beating its own guidance of $6.7 billion. These revenues were driven by strong demand from Chinese handset makers such as Huawei and Oppo and upgrade from 3G to 4G in emerging markets. The second quarter also benefited from the revenue realized from shipments delayed in fiscal 1Q16 due to the earthquake in Taiwan (EWT).

Smartphones are a key market for TSMC, accounting for 55% of the foundry’s revenue. Although the foundry never openly stated who its key customer was, analysts believe it is Apple (AAPL). Apple reported its first decline in iPhone sales in March 2016 quarter and is expected to report another decline in the June 2016 quarter.

The decline from Apple was offset by strong demand for mid- and low-end smartphones. Moreover, TSMC’s customers also started restocking inventory in anticipation of strong seasonal demand in 2H16, in turn boosting the foundry’s revenue.

The foundry also received a strong demand from NVIDIA (NVDA), which manufactured its revolutionary Pascal GPUs (graphics processing unit) on the former’s 16 nm FinFET (fin-shaped field effect transistor) technology.

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Fiscal 3Q16 revenue guidance

TSMC expects revenue to rise by 20% YoY to $7.95 billion at the midpoint in fiscal 3Q16 as it ramps up production of its A10 processors for Apple’s upcoming flagship product iPhone 7, which is due to launch in September 2016. Previously, Apple used TSMC and Samsung (SSNLF) foundries to manufacture its A9 chips for the iPhone 6s line. However, a report in Macrumors stated that Apple selected TSMC as its exclusive manufacturer of A10 processors for iPhone 7 line in February 2016.

Moreover, a report by Taiwan’s Economic Daily stated that Apple has asked its Taiwan-based suppliers to manufacture components for 72 million–78 million iPhone 7 units in 2016. That’s 15% more than the analyst estimate of 65 million units. This renewed optimism among investors, sending TSMC stock up by 24% from February 2016 to date.

In this series, we’ll look at the key factors driving the company’s financial performance in fiscal 2Q16 and beyond.

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