#195 AI Gold Rush: Some Chipmakers Are Striking Gold, While Others Digging for Answers
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In the world of semiconductors, it's a dance between the AI frenzy and the harsh reality of market dynamics.
Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chip maker, just threw a lifeline to investors concerned about whether this AI revolution is a flash in the pan. Spoiler alert: it's here to stay, and the numbers back it up.
TSMC CEO, C.C. Wei, dropped some serious stats, announcing that revenue from AI-related servers and processors is expected to triple this year. That's not a typo, folks—triple! He gleefully shared that one customer described the demand as “insane,” and frankly, we’re all here for this tech craze.
The AI gold rush has companies pouring billions into AI-related chips and infrastructure, convinced that these processors will redefine industries and daily life. But here's the twist—some skeptical investors think this fever might cool down faster than a glitch in ChatGPT.
Is this AI euphoria sustainable? Wei firmly believes so, signaling that TSMC is riding this wave for many years to come.
In the July-September quarter, TSMC posted a mind-boggling 54% increase in net profit, reaching $10.1 billion, while revenue surged 39% to $23.6 billion. But not everything in the semiconductor world is glowing with AI-powered optimism.
The Other Side of the Chip—Slower Growth Beyond AI
While AI chips are flying off the shelves, other areas in the semiconductor industry are moving at a snail’s pace. Consumer products like smartphones have reached peak demand, and manufacturers are trying to work through stockpiles of chips hoarded during the pandemic like doomsday preppers. It’s like having too many canned beans—except these chips cost billions.
ASML, a major supplier of semiconductor-manufacturing equipment, recently warned that the recovery in the broader chip industry could drag into next year. That news hit like a dropped wafer, sending ASML shares plummeting over 20%, and other chip stocks weren't far behind.
The market clearly has a bipolar relationship with AI—it loves it when things are going up, and it panics the moment someone mentions "inventory glut."
Now, here’s where it gets interesting.
Companies like TSMC, Nvidia, and Apple are basking in AI's limelight, but suppliers of manufacturing gear—like ASML, Applied Materials, and Lam Research—are navigating tricky waters.
Demand for AI chips is soaring, but the rest of the semiconductor landscape isn’t pulling its weight. It's like being invited to the world's biggest party, only to discover that half the guests are still stuck in traffic.
The delicate dance here is in capital expenditures. TSMC, for example, expects to shell out over $30 billion in capex this year, much of it earmarked for new factories abroad, including a trio of facilities in Arizona.
That Arizona project, expected to hit a total of $65 billion, isn’t a small gamble. TSMC’s first plant there has entered trial production, and it’s already showing promising yield rates. Volume production is slated for 2025, just in time to meet the swelling demand for AI processors that will power everything from self-driving cars to sentient toasters.
Not everyone is riding high like TSMC. Intel and Samsung, TSMC’s closest rivals, are struggling. Intel, for example, has been facing slipping market share in both data centers and PCs—two segments that used to be its bread and butter. It's like watching an Olympic sprinter pull a hamstring right before the race starts. Intel’s been forced to slash capital spending to conserve cash, with forecasts predicting an 8% drop this year and a 15% cut next year.
Samsung is also feeling the heat. The world’s largest memory-chip maker recently apologized to investors for its fumble in producing the specialized memory required for AI workloads. Its capex is expected to drop 4% this year, but analysts are betting on a recovery in 2024. Fingers crossed.
Meanwhile, ASML has its own set of challenges. Its lithography gear is essential for producing the most advanced chips, but its recent earnings report showed that net bookings were only $2.8 billion in Q3—less than half of what Wall Street had hoped for.
ASML’s CEO, Christophe Fouquet, tried to downplay the panic, but investors were already running for the exits, with the company’s stock shedding 20% in just two days. Talk about a bad week at the office.
In all this, let’s not forget China, which has been aggressively investing in its domestic chip industry in response to U.S. export controls. For ASML, China historically represented around 15% of its annual sales, but in recent quarters, that figure has jumped to an astonishing 48%.
Analysts have long suspected that this surge in Chinese demand was unsustainable—and guess what? They were right. ASML expects China’s contribution to revenue to normalize at 20% next year. It seems even the Great Wall can’t hold back market forces forever.
In the midst of this tech frenzy, what’s clear is that companies in the AI and semiconductor spaces need to navigate carefully. Chipmakers like TSMC are reveling in the AI boom, while suppliers of manufacturing equipment are feeling the pinch.
For investors, the challenge lies in separating the wheat from the chaff—AI’s soaring demand doesn’t necessarily translate to success for everyone.