Netflix & Taiwan Semiconductor Earnings Reviews

Digesting the results of these two large caps.

1. Taiwan Semiconductor (TSM or TSMC) – Earnings Review

Taiwan Semi builds chipsets for other companies like Nvidia, AMD and Qualcomm. It does so in its highly expensive, highly complex chip fabrication plants. These are called “fabs” for short and arguably provide one of the deepest moats in public markets.

Needed Definitions:

  • Fab means a factory.

  • Nanometer (NM) describes the chip technology. Smaller NM is more advanced, as it uses smaller transistors. This means TSM can pack more transistors into a single chip while making those chips more energy efficient and cost-effective.

    • “Advanced Technology” revenue is revenue from 3nm (N3), N5 & N7 technology. Anything under 7nm is “advanced.”

  • Wafer refers to the raw materials (like silicon) that are used to manufacture chips. Wafers are used to build integrated circuits (ICs), with the transistors within these ICs guiding and facilitating functions. Nvidia’s Blackwell and Hopper chips are considered ICs.

  • Chip-on-wafer-on-substrate (CoWoS) is a packaging process that combines chips into a single unit.

a. Demand

Taiwan Semi beat revenue estimates by 1% & beat revenue guidance by 3.1%. Its 16.5% 3-year revenue compounded annual growth rate (CAGR) compares to 9.8% last quarter and 13.5% two quarters ago.

b. Profits & Margins

  • Beat 54.7% gross profit margin (GPM) estimates by 310 basis points (bps; 1 basis point = 0.01%) & beat GPM guidance by 330 bps.

  • Beat EBIT estimates by 9.4% and beat EBIT margin guidance by 400 bps.

  • Beat $0.36 GAAP EPS estimates by $0.03, which represents about an 8.3% net income beat.

  • Beat 31% return on equity (ROE) estimates by 240 bps.

c. Balance Sheet

  • $69 billion in cash & equivalents.

  • Inventory rose 12% Y/Y. Inventory Turnover days were 87 vs. 83 Q/Q and 96 Y/Y. This rose Q/Q due to a “pre-build” of N3 and N5 wafers.

  • $30.5 billion in bonds payable.

  • Share count was roughly flat Y/Y.

  • Dividend payments rose by 30% Y/Y.

d. Guidance & Valuation

For the full year, TSM sees “close to 30%” Y/Y revenue growth. This is a raise vs. “slightly better than mid-20%” growth guidance offered last quarter. It also changed annual CapEx guidance from $31 billion to “slightly higher” than $30 billion.

  • Q4 revenue guidance beat by a robust 6%. That’s excellent for a company this large.

  • Q4 GPM guidance beat 54.7% estimates by a handsome 330 bps.

  • Q4 EBIT guidance beat estimates by 14%.

TSM trades for 23x forward earnings. EPS is expected to grow by 30% in each of the next two years.

e. Call & Release Highlights

Demand Context:

Advanced technology represented 69% of wafer revenue vs. 59% Y/Y. This was powered by 11% Q/Q growth within its high performance computing (HPC) bucket. HPC is now 51% of overall sales vs. 52% Q/Q and 42% Y/Y. Internet of Things (IoT) growth also materially boosted advanced technology results. Specifically, that bucket enjoyed 35% Q/Q expansion and a rise from 6% to 7% of total wafer revenue.

  • Smartphone revenue rose 16% Q/Q to 34% of revenue vs. 33% Q/Q.

  • Automotive revenue rose 6% Q/Q to 5% of revenue vs. 5% Q/Q.

  • Digital Consumer Electronics (DCE) revenue fell Q/Q and shrank from 2% of revenue to 1%.

For non-AI demand, leadership called the environment stable. For AI specifically, it sees 2024 processor revenue contribution tripling to 15% of total. Nvidia’s boom is TSM’s boom too. When asked about durability of GenAI demand, leadership reminded us that it works with all of the companies making AI chips, frequently communicates with them, and sees demand remaining very strong. When asked about GenAI return on investment (ROI) for clients, CEO C.C. Wei offered tangible examples of the technology driving considerable efficiency and cost gain internally. Those improvements are transferable to other companies.

“We continue to observe extremely robust AI-related demand from our customers throughout the second half of 2024. This is leading to increasing overall capacity utilization rates for our leading-edge 3-nanometer and 5-nanometer process technologies. One key customer said the demand right now is insane and that it's just the beginning... it will continue for many years.”

CEO C.C. Wei

Margin & CapEx Context:

This was the most impressive piece of the report to me, and more context is needed. As a reminder, ramping up new nano-chip technology always leads to gross margin dilution. It takes time for economies of scale to eventually power margin parity between new products and older ones. Last quarter, TSM also told us that shifting some N5 production capacity to N3 would be a 100-200 bps GPM headwind for 2024. This change and new tech scaling perfectly coincided with electricity inflation in Taiwan. All of these GPM challenges were amplified by expansion to higher-cost regions for another 200-300 bps of GPM impact.

With all of this context, 350 bps of GPM expansion and the large beat were certainly notable highlights. Where did the outperformance come from? Per the team, higher capacity utilization (CEO quote above fares well for that continuing) and successful “cost improvement efforts” were the two primary sources. The headwinds described above have not improved at all, these positive items just overcame the obstacles. The strong Q4 GPM guide was due to the same factors.

On the CapEx side, budget allocations remain the same as TSM invests ahead of future demand. 75% of earmarked CapEx is for advanced process technologies and 15% is for specialty technologies. Complementary Metal-Oxide-Semiconductor (CMOS) is a type of specialty technology that TSM offers. It’s an IC used in logic processes to help assign functions. 

The remaining 10% of the CapEx budget is for the advanced packaging, testing and mass marketing bucket; this makes up a little more than 10% of overall revenue. Last quarter, TSM raised its total addressable market (TAM) from $115 billion to $230 billion for the foundry business. That was based on including packaging and testing in the equation. Packaging includes storing and integrating chips with thermal protection, maintenance and connectivity tools too. Traditional foundry services make up the actual creation of an IC or chip for a customer. TSM had a 28% market share of this extended TAM definition in 2023, which it saw rising in 2024 as of last quarter. No update this quarter. Based on the quality of this team, I would take that as a reiteration; they would tell us if previous forecasts were worsening.

  • TSM and Amkor deepened an existing partnership to “collaborate on advanced packaging” in the U.S. 

Global Manufacturing Capacity:

All of these projects make TSM less dependent on Taiwan for running its business. Considering rather heated geopolitical tensions between Taiwan and China, that’s very important. In Arizona, coordinated government support led to “strong progress” over the last several months. CEO C.C. Wei continues to envision 3 fabs in the state, with clean rooms 2x the size of its Taiwan locations. The first factory actually began producing N4 chips with “highly satisfactory results and a very good yield” in April. It expects production there to scale by early 2025. The second and third factories will “utilize more advanced technologies” and will enter volume production in 2028 and 2030, respectively.

Government support in Japan was also called strong. It has a specialty tech factory gearing up for volume production this quarter. Another fab is planned there to support HPC demand, with production hopefully starting by the end of 2027. In Europe, construction on the Germany fab has begun, with volume production scheduled for the end of 2027 as well.

Leadership acknowledged the “fragmented globalization environment” and elevated costs in its newer geographies. That will mean lower margins in its new plants vs. its old ones for now. At the same time, TSM knows it can rely on its “manufacturing technology leadership and its large manufacturing base.” With these strengths, it fully expects to remain the “most efficient and most cost-effective manufacturer” in all of the regions where it conducts business. So lower margin than its most mature facilities… but still higher margin than everyone else.

Newest Technologies:

We didn’t hear much about its newest N2, N2P and N16 (1.6 nanometer) roadmaps. I thought I’d include last quarter’s commentary on these important projects to keep them fresh on investor minds. These will be future growth drivers. Last quarter, N2 had been progressing well on performance, density and yield gains vs. the N3 platform. N2P was in very early stages of development, but already with incremental performance gains vs. N2. N2P is scheduled for volume production during the 2nd half of 2026, along with its newest N16 technology. N16 is for HPC use cases. This comes with a separate power rail with backside power delivery (first of its kind). Traditionally, power is transferred to transistors from the front of the chip. By moving it to the back, energy efficiency and heat management are both improved. N16 unsurprisingly offers considerable performance gains vs. N2P. It’s always iterating.

Final Notes:

  • TSM has no interest in purchasing Intel’s potential spin off of its Integrated Device Manufacturer (IDM) business.

  • The sector’s recent interest in chiplets (small chip units that are combined like Legos to form bigger chips) has had no impact on TSM’s core demand, which had been a small analyst concern. For example, they see “more N2 demand than they ever dreamed about.”

  • It sounds like TSM will use more nuclear energy going forward.

f. Take

This was an elite quarter and guide from an elite team and company. It is optimally positioned to capture the large GenAI opportunity through relationships with Nvidia and AMD. This business is masterfully executing with no slowdown currently in view. The only thing that makes me worry here is geopolitics. That’s really the risk, as it has been for years. Congratulations to shareholders on the wonderful results.

2. Netflix

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