By Jeff Reeves
A leading narrative for investors in 2021 is chronic supply-chain problems weighing on many sectors of the economy, particularly the impact of chip shortages and disruptions in the semiconductor sector.
On one hand, widespread disruptions at chipmakers have trickled down to other industries. A recent report in the Washington Post, for instance, calculated the auto industry stands to miss out on about $210 billion in sales with nearly 8 million fewer vehicles sold as a result of these high-tech supply-chain issues. On the other hand, technology consultancy IDC just warned that some chipmakers may risk overcorrecting as they ramp up supply, leading to a global glut in chips by 2023 .
But who knows for sure?
If the pandemic has taught us anything, it’s that even the most thoughtful predictions can be woefully off target. As the semiconductor industry fights through factory shutdowns across Asia in the wake of COVID-19, it’s worth taking a look at the recent batch of third-quarter earnings from major manufacturers in the space to make sense of the current state of play.
Here are five recent, high-profile earnings reports in the semiconductor sector and the key takeaways from each:
Taiwan Semiconductor: Strong margins and sales at the world’s biggest foundry
As the world’s largest microchip manufacturer, as measured by market capitalization, the $600 billion Taiwan Semiconductor Manufacturing /zigman2/quotes/204359850/composite TSM -1.95% is in many ways the most prominent sign of the industry’s health. This is not just because of its size, but also the fundamentals of its model. Rather than running a high-profile research shop that banks on the success of its proprietary designs, TSM is a manufacturer that specializes in custom-built chips for third-party clients who simply don’t have their own factories.
Here’s the key takeaway from TSM in a nutshell: Earnings beat expectations, and guidance was revised higher, all on the back of improving margins. Specifically the chipmaker reported gross margins of 51.3%, up from 50% the prior quarter. And looking forward, company guidance is calling for 51% to 53% margins as profitability expands further, thanks to strong demand for its services from third parties.
This dynamic is logical, given factory disruptions have enabled TSM to command a premium for operations at its facilities. But investors should be encouraged that these margins aren’t happening amid a shrinking top line. Consider that for the fourth quarter, Taiwan Semiconductor forecast revenue of $15.5 billion — well above last year’s tally of about $12.9 billion and a sign the business continues to expand on all fronts.
Shares of TSM stock are admittedly in the red year to date, but hints of strength like this third-quarter earnings performance are also a reason shares are up more than 35% from recent 52-week lows on hopes of a turnaround.
Intel: Depending on legacy chips comes with risk
Unlike TSM, branded chip icon Intel /zigman2/quotes/203649727/composite INTC -0.51% is very much reliant on its own patents and research to drive performance. And unfortunately, the Intel brand hasn’t been doing great lately.
In its latest earnings report , the chipmaker fell short on several fronts — including third-quarter revenue as well as future margin projections. Those revenue shortfalls were driven by the fact that Intel is still very much dependent on the PC business, which isn’t exactly going like gangbusters in a mobile age, but also its data center business, which is underperforming.
The worst sign of all for investors, however, may be projections of earnings and margin trouble in the near future.
Intel Chief Executive Pat Gelsinger, who took the helm just this year, told analysts in a rather active conference call that its margins might be under pressure but will remain “comfortably above 50%” and that the company is at a “pivot point” in taking its business to the next level. But skeptical investors have heard this song and dance before — and based on the massive 11% decline in INTC stock on Oct. 22, they may not be buying this narrative that all is well for a company with specific product challenges at a time of general uncertainty for the industry.