TSMC Just Showed Its Chips Are Hot

(Bloomberg Opinion) -- Investors looking for signs that the worst is over for the chip sector would be pleased by what Taiwan Semiconductor Manufacturing Co. served up Thursday. All of its key earnings data point to a rebound in demand, and more importantly to pragmatic inventory management after a glut last year dragged down the entire industry.

TSMC’s third-quarter net income beat estimates and its fourth-quarter revenue outlook came in at the top of analysts’ expectations. But the standout headline from the company’s investor conference was its decision to boost its capital expenditure this year by close to 40%. By the end of September it had already shelled out $9.4 billion of the “more than” $11 billion it had previously expected for the full year.

That may seem like a brave wager, considering a deepening trade war on two fronts — between the U.S. and China, as well as Japan and South Korea — and President Donald Trump’s campaign against TSMC’s key client, Huawei Technologies Co. Just months ago, shoppers were eschewing futuristic gadgets and putting off smartphone upgrades. But TSMC has rarely made mistakes about how to spend its capex: This plan is not only bold but smart.

The world’s biggest chipmaker plans to spend a record-breaking $14 billion to $15 billion this year on the leading-edge equipment it needs to manufacture chips for devices such as Apple Inc. iPhones and Huawei’s smartphones. The company turned more aggressive, CEO C.C. Wei explained, because it sees stronger-than-expected demand for next-generation manufacturing technologies. These chips will be used in smartphones, data centers, IoT devices (think Amazon Alexa) and even cars, he said.

Wei said he’s confident that the higher spending will be justified by quicker revenue growth, especially with faster fifth-generation mobile networks and handsets ready to go mainstream in the coming year. Because of the technology involved, 5G networks require more base stations than an equivalent 4G rollout, which will further help semiconductor sales.

What should really cheer investors, though, are the figures that often get overlooked, namely inventory. One of the biggest problems afflicting the sector a year ago was that companies — from Apple to PC-chipmaker Intel Corp. and iPhone assembler Foxconn Technology Group — all overshot the mark when it came to buying and building chips, only to be met with lackluster demand from consumers.

TSMC’s inventory, measured in Taiwan dollars, fell by 8.2% in the September quarter, the biggest drop in more than two years. Days of inventory — another measure that tracks its stockpiles — dropped to 65 days, the lowest in 18 months. This shows that there’s a smaller risk that TSMC and its clients got ahead of themselves this time.

Before celebrating a new dawn for the tech sector, there is a caveat. More sales for TSMC doesn’t necessarily mean more devices being sold to end consumers. That’s because smartphones are becoming even smarter, requiring more chips inside. High-end cameras, for example, require higher-resolution sensors, which in turn means more chips within a phone to manage the power, data and memory that such functionality requires.

That said, investors looking for an excuse to jump back into tech shares got exactly what they needed from TSMC. If not signs of stronger demand, evidence of pragmatic inventory management makes it look like a safer sector to place a bet.

To contact the author of this story: Tim Culpan at tculpan1@bloomberg.net

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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