Two days is a long time in the chip world. On Tuesday, the semiconductor market was downbeat following disappointing earnings from ASML, a Dutch company making the machines that make chips.
By Thursday, Taiwan Semiconductor Manufacturing Co., the world's largest chipmaker and one of ASML's biggest customers, had painted a different picture with its earnings: The AI-driven chip boom is far from over.
The roller-coaster earnings can be explained by several factors. Chief among them is TSMC's and ASML's respective customers.
ASML sells large lithography machines — which print circuit patterns onto silicon wafers — to chip manufacturers, including TSMC, Samsung, and Intel.
The latter two companies have faced struggles of their own that are affecting the wider chip market.
Intel, once the world's biggest chipmaker, has mounted a bid to turn its business around, including 15,000 layoffs. In early October, Samsung issued an apology for its poor financial performance.
"Intel and Samsung are falling behind TSMC from a technological point of view," Javier Correonero, an equity analyst at Morningstar, told Business Insider. "This is just customer-specific problems as Intel and Samsung cannot ramp up new nodes properly, but this has nothing to do with demand."
Meanwhile, TSMC is a competitor to Intel and Samsung. Its customers include Nvidia, the graphics-processing-unit designer spearheading the AI-chip boom, along with AMD and Qualcomm. This makes TSMC a good bellwether for AI-chip demand.
TSMC reported a 54% rise in third-quarter net profit to a record 325.3 billion New Taiwan dollars, or about $10.1 billion. The forecast-beating results were driven by strong demand for AI despite lingering questions over the technology's return on investment.
By contrast, ASML, Europe's most valuable tech company, slashed guidance for next year, sending its stock plunging by 16% in its biggest single-day drop since 1998. Other chip stocks followed, with Nvidia dipping almost 5%, AMD falling 5.3%, and Broadcom tumbling 3.5% about midday Tuesday. Their shares steadied on Wednesday.
Another factor at play is that chipmakers increased their manufacturing capacity to meet rising demand during the pandemic. Now chipmakers such as Intel, Samsung, and TSMC have pulled back on ASML orders because they realize they have plenty of capacity, Dan Hutcheson, the vice chair at the analyst firm TechInsights, told Reuters.
It's also key to distinguish that not all chips are for artificial intelligence — and weaker demand for other areas, like PCs, can drag growth.
"It is important to notice that semis have many subsegments, and while some subsegments can be in a bottom (like PCs), others can be on a top (AI), so it's difficult to predict where overall demand will be in 18 months," Correonero said.
Demand for AI remains high
In a conference call on Thursday, TSMC's chief executive, C.C. Wei, told investors that the company's growth was real and rejected the idea that AI was in a bubble.
"This is a tangible ROI benefit," he said in response to a question from Gokul Hariharan, a JPMorgan analyst. "We cannot be the only one company that have benefited from this AI application. So I believe a lot of companies right now are using AI and further on improving productivity, efficiency, and everything."
For now, investors seem to favor faster-growing companies like TSMC.
"It looks like TSMC seems to be in the better place for the time being, bolstered by its faster growth rate," Correonero said.
"TSMC seems more aligned with Nvidia and others, where demand has held up much better in recent months and, indeed, shows signs of recovering after a mixed summer," he added.
While a slowdown at ASML might suggest some caution, the bigger picture still points to a continued surge in AI demand.
"In the short to medium term, AI applications, data centers, and advanced chips are still driving strong demand," Kate Leaman, the chief market analyst at AvaTrade, said. "So while ASML might be experiencing a temporary slowdown, companies like TSMC could continue delivering strong results thanks to these high-growth areas."
As other chip firms, such as Qualcomm and Intel, publish earnings in the coming weeks, a clearer picture of the market will emerge.
"For now," Leaman added, "the AI boom seems to be sustaining solid growth for chipmakers."
