TSMC says AI demand 'not enough' even as Q2 profit beats expectations

Investing.com -- Taiwan Semiconductor Manufacturing Co (NYSE:TSM) (TW:2330), or TSMC, logged a higher-than-expected second-quarter profit on some resilience in chip demand, but warned that a boom in artificial intelligence will not be enough to offset a broader industry downturn.

The firm, which is the world’s largest contract chipmaker, and also a key supplier to Apple Inc (NASDAQ:AAPL) and Nvidia Corporation (NASDAQ:NVDA), said net profit in the three months to June 30 fell 23% to 181.80 billion Taiwan dollars (US$1 = T$31.07), compared to T$237 billion a year ago. The figure was well above a Reuters estimate of T$172.5 billion.

While the year-on-year decline in profit was partially due to a strong performance last year, it also reflects a slowdown in semiconductor demand through 2023, amid rising interest rates and worsening global economic conditions.

Profitability is expected to worsen in the coming quarter, with the chipmaker's gross profit margin set to drop to 51.5% to 53.5% in the third quarter from 54.1% in the second quarter, while operating profit margin is also expected to decline to between 38% and 40% from 42%.

The firm said that it faced increased headwinds from a broader economic downturn, which was keeping chip demand subdued after a bumper 2022. TSMC also struck a less optimistic note on an artificial intelligence-driven boost to chip demand than some of its peers.

"While we have recently observed an increase in AI-related demand, it is not enough to offset the overall cyclicality of our business," CEO C. C. Wei said in a post-earnings webcast. 

Nvidia, one of TSMC’s biggest customers, had forecast a resurgence in chip demand this year, driven chiefly by increasing interest in AI amid the growing popularity of generative AIs such as Chat GPT. AI programs require a high amount of computing power to operate, and also utilize purpose-built chips, which Nvidia says are set for a demand boom this year.

Recent media reports said that even Apple was planning on joining the AI race. 

TSMC’s quarterly revenue came in at T$480.84 billion, down 10% from the same period last year. The firm said third-quarter revenue is expected to remain largely steady from the second, in a range of US$16.7 billion to US$17.5 billion.