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Could TSMC’s Guidance Mark the Start of a Semiconductor Slowdown?

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TSMC’s fourth-quarter revenue

TSMC (TSM), the world’s largest foundry, earns revenue by manufacturing chips for other chipmakers on its manufacturing nodes. On January 17, the foundry took the semiconductor industry by surprise by reporting weaker-than-expected revenue guidance for this year’s first quarter.

As shown in the graph below, TSMC’s first half is usually weaker than its second half, which includes the holiday season—it manufactures processors for consumer electronics such as PCs, smartphones, and game consoles, whose sales pick up during the holidays.

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In last year’s fourth quarter, TSMC’s revenue rose 10.7% sequentially and 2.1% YoY (year-over-year) to a record $9.4 billion, in line with its $9.35 billion–$9.45 billion guidance. The revenue growth was largely driven by smartphone chip orders from Apple (AAPL), Huawei, and Qualcomm (QCOM) offsetting weak orders for GPUs (graphics processing units) from NVIDIA (NVDA), which halted midrange GPU shipments due to excess channel inventory.

TSMC’s first-quarter revenue guidance

TSMC’s revenue usually falls by a high-single-digit percentage rate in the first quarter. However, this year, the foundry expects its revenue to fall 22% sequentially and 13% YoY to $7.35 billion in the first quarter, as a result of last year’s quarter benefiting from the cryptocurrency boom, which boosted orders for NVIDIA’s GPUs and Bitmain’s ASICs (application-specific integrated circuits). This year’s first quarter won’t include that crypto boom revenue.

The guidance of revenue falling 22% sequentially, more than usual, is based on smartphone demand falling suddenly. When TSMC released its fourth-quarter results, CFO Lora Ho stated that she expects business to slow in the first quarter due to mobile market seasonality, a weak macroeconomic outlook, and a high semiconductor supply chain inventory. Next, we’ll look at how semiconductor inventory issues could affect TSMC’s 2019 earnings.

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