TSMC board appropriations are up 45% year over year, pointing to roughly $43.5 billion of 2022 capex and 20% revenue growth against 3% for Taiwan.
We have more interest than usual in TSMC's earnings call this quarter, so here is a short update on our view. We are also folding in a note we wrote in mid-2021, so the long-term argument sits in one place for the record.
Key takeaways
- Capital appropriations approved by TSMC's board over the last four quarters are 45% higher than the same four quarters a year earlier. Apply that same 45% to 2021 capital spending (capex) of about $30 billion and 2022 spending lands near $43.5 billion.
- The board budget gives you the direction of capex, never the exact amount. An increase is close to certain; the size of it is what the January 2022 call has to answer, along with how far margins improve after the price increases TSMC has already announced.
- On the analyst consensus we compile, aggregate revenue growth for the TAIEX, Taiwan's main market index, falls from 13% in 2021 to 3% in 2022 and operating profit growth falls from 45% to 8%. TSMC goes the other way: revenue growth 18% to 20%, operating profit growth 14% to 24%, with year over year growth holding near 20% in every quarter.
- With liquidity tightening in 2022 and electronics inventory possibly correcting in the second half, money rotates into whatever is still compounding profit above 20%. We expect TSMC to beat the index by a wider margin in 2022 than it did in 2021, and over the long run we think TSMC can double.
Capex is going up, and profitability has room to improve
TSMC discloses the capital appropriations its board approves at each meeting, which is the cleanest early read on where capex is headed. The upward revisions over the past few quarters have been large. Add up the last four quarters of approvals and the total is 45% above the same four quarters a year earlier. Apply that same 45% to 2021 capex of about $30 billion and 2022 capex comes out around $43.5 billion.
Experience says to treat that as a direction rather than a forecast. The board capital budget tells you which way capex is moving, but it will not pin down the number. So we would put it this way: TSMC raising capex is close to certain, and how far it raises has to wait for the call.
Adding to an already high base points to two things: clearer customer demand at the leading edge, and higher construction costs for fabs going up in several locations at once.
The argument the market keeps having is whether TSMC's enormous capex can actually produce matching revenue and profit growth. We set out why that does not worry us in our Data Driven Tech Revolution series, but we would still like the company to raise its long-term growth target at this call. Otherwise every quarter turns into the same fight between believers and skeptics, and that argument is wearing thin.
Better profitability is the other clear direction into this call, now that TSMC has announced price increases. How far it improves depends on the new guidance the company gives.
Set against the rest of the market, TSMC's 2022 looks very attractive. On the current analyst consensus we compile, aggregate revenue growth for TAIEX constituents drops from 13% in 2021 to 3% in 2022, and operating profit growth drops from 45% to 8%. TSMC moves the opposite way. Consensus has its revenue growth rising from 18% in 2021 to 20% in 2022, and operating profit growth from 14% to 24%, with year over year growth holding near 20% in each quarter ahead. That points to a strong full year.
Put it in relative terms. 2022 brings tighter liquidity and an electronics inventory correction that may start in the second half. A company that can still grow profit more than 20% through that is the kind of name money rotates into, so TSMC's performance against the index should be a good deal better in 2022 than it was in 2021.
Near term, we think consensus still has room to be revised higher, though how much depends on what the company announces at the call and is genuinely hard to guess. Look further out and the answer has been simple for years.
Over the long run, we think TSMC can double
Our Data Driven Tech Revolution series made the case that the megatrend created by AI and 5G gives semiconductors a long runway of exponential growth.
Data has changed how people live and how companies operate. Pulling value out of the data explosion takes more high performance computing (HPC) silicon. The battleground at the leading edge is HPC, and the customers for HPC are the large cloud companies. Before judging whether that demand holds, check whether the cloud companies are still getting better returns from their shift to software and subscriptions. Through the last reported US earnings season, the third quarter of 2021, the answer is still yes.
Within semiconductors, the data center has always been the most profitable piece for HPC chipmakers, and it is what the past two years of M&A and strategy changes have been about. HPC never stops chasing energy efficiency, and that forces the chip designers and the foundry to work more closely together. Owning design support through packaging makes the foundry harder to replace and worth more.
3D packaging and chiplets do mean a chip no longer has to be built entirely on the most advanced node. Whether that weakens leading edge demand comes down to whether it expands customer demand and grows the pie. If advanced packaging locks in more customers, makes their products harder to copy, and leaves competitors further behind, that advantage becomes an enormous moat for TSMC.
Below 28nm, and smaller nanometer numbers mean a more advanced manufacturing process, every new major node brought the same worries: first 16nm, then 7nm. Advanced 3D packaging now brings them again. Who is going to pay for something this expensive? Can the cost of the leading edge be passed on? Will the huge investment ever be recovered? All of them come back to the same two questions: is there enough demand out there, and is that demand solid enough.
The Data Driven Tech Revolution, Part 5, our December 2021 post on rising corporate spending and faster digital transformation, makes most of that case. For a company, digital transformation is no longer a choice. It decides whether the company is still around.
Over the six months to January 2022, US HPC chipmakers kept revising future revenue and profit estimates higher, which says the pie itself is getting bigger. NVIDIA is the clearest case. In mid-2021 it raised its 2025 total addressable market (TAM) to $100 billion, against data center revenue over the trailing four quarters, Mellanox included, of under $9.5 billion.
Facing a large market growing that fast, TSMC holds the key technical position and has real pricing power. It is a question of whether the company wants to use it, not whether it can.
We do not know whether this call will clear up the market's doubts about TSMC. On the long-term trend, TSMC is still a core position we would not trade around.