Taiwan Semiconductor (TSM, Financial) is climbing back toward last week's record highs following a report that the company plans to raise the price of its 3-nanometer products. TSM manufactures various nanometer chips, with its 5nm chip accounting for the majority of its latest quarterly wafer revenue. Smaller chips free up more space, allowing for more transistors on the same chip, thus increasing power output.
Price hikes are generally well-received as they can boost revenue and margins. TSM's announcement is particularly welcomed for several reasons:
- TSM anticipated stronger business growth starting in Q2, with a more robust second half of the year. Its 3nm products were expected to play a significant role in this growth, driven primarily by AI. Chip designers like NVIDIA (NVDA, Financial) and Advanced Micro Devices (AMD, Financial) are eager to advance in the AI race. Although AI accounted for only 9% of wafer revenues in Q1, TSM expected this to ramp up next quarter.
- However, increasing revenue contribution from 3nm technologies was compressing gross margins. TSM projected a 3-4 point hit to gross margins due to the uptick in 3nm revenues, 1 point worse than the dilution in Q1. Additionally, converting some 5nm tools to support 3nm capacity would further dilute margins by 1-2 points in the second half of the year.
- As a result, TSM targeted gross margins of 51-53% for Q2, a 2-point drop at the low end from the 53.1% achieved in Q1. TSM did not provide FY24 margin guidance but reiterated its long-term target of at least 53%, excluding FX impacts. The company emphasized its efforts to control internal costs.
Given this context, TSM's planned price hikes for 3nm products are being applauded by the market. With companies like NVDA seeing massive revenue growth, driven by high demand for AI, investors may have questioned whether TSM was charging enough to manage costs and maintain long-term gross margin goals. In April, TSM mentioned it was working on pricing as chip demand continued to rise. For comparison, NVDA's adjusted gross margins reached 78.9% in Q1, up over 12 points year-over-year and 2 points sequentially. NVDA's strong margins likely mean it is open to TSM raising prices, which would have little impact on NVDA's profitability while helping to squeeze out smaller competitors.
In summary, reports of TSM hiking the price of its most powerful AI chip are generating significant enthusiasm, potentially offsetting projected margin dilution and pushing shares back toward all-time highs.
