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On Thursday, July 15, Taiwan Semiconductor Manufacturing (TSM), the world’s leading chip foundry, reported earnings of 93 cents a share for the second quarter, up 18% year over year. That was inline with analyst estimates.

Sales rose 28%.

The company raised its revenue guidance for the third quarter to a range of $14.6 billion to $14.9 billion. The midpoint of that range, $14.75 billion, was above the Wall Street consensus estimate of $14.57 billion. Sales in the third quarter of 2020 are $12.4 billion.

Taiwan Semiconductor said that it now expects sales to grow more than 20% this year, an increase from the 20% target announced earlier in the year. For 2020-2025, the company raised its revenue forecast to a compound annual growth rate of 15% from a previous target of 10% to 15%.

But the stock dropped 5.5% on July 15 and fell another 1.52% on Friday, July 16.


Disappointing gross profit margins and the forecast of lower gross margins ahead.

We’re not talking about a big miss. Gross profit margin in the quarter was 50%, which was just below the consensus Wall Street estimate of 51%. But both the actual number and Wall Street’s projection was lower than the 52.4% margin in the second quarter of 2020. The company also lowered its long-term gross margin forecast to 50%. That lower margin implies that the company will report earnings of just $1.02 in the third quarter, lower than the $1.05 Wall Street consensus.

Part of the margin problem is industry wide. When you’re #1, everybody is gunning for you and all of the company’s competitors from GlobalFoundries to Intel to Samsung are adding capacity. More chip supply means slightly smaller chip profit margins. On Friday Intel announced a $30 billion bid to buy GlobalFoundries and Samsung announced that it would open a second new manufacturing plant in Texas.

Part is a worry about a potential build in inventories. Nearly a fifth of TSMC’s sales came from 5-nanometer last quarter. That’s an increase from just about zero a year earlier. There’s some fear that many/some/a few customers might have double-ordered to make sure that they enough of the new, smaller chips. That would have the effect of lowering orders and sales in future quarters.

And part was a reaction to the company’s forecast that the current shortage of chips used in automobiles looked to be ending. The company said that the shortage of semiconductors for use in automobiles will be greatly reduced beginning in the current quarter. The company will increase its output of micro controllers for cars this year by nearly 60% from last year.

An earlier than expected end to the auto chip shortage on a huge surge in supply from Taiwan Semiconductor would have the effect of compressing margins for these chips.

That’s not a huge negative for Taiwan Semiconductor (although it is a huge positive for auto makers who have been forced to reduce output due to the chip shortage.) Sales of automotive chips accounted for just 4% of total revenue at Taiwan Semiconductor. The company makes much more of its revenue from 5G smartphones, Apple’s iPhone, graphics chips, and central-processing unit chip used in high-performance computing applications.

All this negative news on potential margins weighed on other chip stocks on Thursday and Friday. Advanced Micro Devices (AMD) was down 2.38% on Thursday and another 1.20% on Friday. Nvidia (NVDA) was down 4.41% on Thursday and another 4.25% on Friday.

But that third reason for margin compression, while not a huge deal for Taiwan Semiconductor was an even bigger dose of cold water for chip companies specializing in automotive semiconductors. NXP Semiconductors (NXPI) fell 4.49% on Thursday and 2.21% on Friday. Infineon Technologies (IFNNY) dropped 2.71% on Thursday and 3.31% on Friday.

These drops come before these chipmakers report their own earnings. Advanced Micro Devices reports on July 27. NXP Semiconductors reports on August 2. Nvidia reports on August 18. And Infineon reports on September 1. Which means that the turmoil created by the earnings and guidance from Taiwan Semiconductor comes far enough ahead of earnings reports to set up some interesting options trades ahead of earnings.