TSMC Q1 25– No Wobbles

AI freight train is still rolling. 

• The threat of tariffs, trade war, China restrictions and stock market volatility have been unable to dent TSMC, which reported good results and underlined that AI will continue to drive its revenues in 2025.
• Q1 25 revenues / EPS were NT839bn / NT13.94, broadly in line with estimates of NT837bn / NT13.62.
• TSMC confirmed that its 25% YoY growth guidance in 2025 remained intact and that it would still spend $38bn – $42bn in capex.
• A meaningful part of this is due to the chips it is making for AI datacentres, where revenues are expected to double again in 2025, confirming that the mad scramble to build datacentre capacity remains on track.
• Although this represents no change to estimates, the shares rose nearly 4%, clearly reflecting some alleviation of fears that there would be some impact from all of the chaos caused by US attempts to rewrite the rules of global trade.
• This underpins my view from yesterday (see here), where the weakness that ASML saw in bookings was not related to a sudden drop in AI-related demand but was more a reflection of tariff nervousness and a decline in demand coming from China due to tightening restrictions.
• Hence, I expect that when Nvidia, AMD and so on report in a few weeks, they will confirm this trend, meaning that the outlook for 2025 remains good.
• Consequently, there is also likely to be no change in capex estimates from Google, Amazon and Microsoft when they report their calendar Q1 25 results
• While this is good news for the short term, the stage is still being set for a correction as the attitude of the big cloud providers is that overbuilding is better than underbuilding in this environment.
• Here, I disagree because this is precisely what the telecom operators said in 1999 and 2000 when asked if they were overbuilding fibre optic networks to support the internet.
• This view was rapidly turned on its head when it turned out the internet was not fast and mature enough to handle all of the use cases that were postulated at the time and that we take for granted today.
• The problem was that between 2000 and 2004, there was a dip where you could not give fibre optic capacity away, and I suspect that in AI infrastructure, something similar could easily occur.
• However, I have no doubt that when the AI correction comes, it will be smaller and far less painful than the internet bubble 25 years ago.
• This is because, despite its hallucinations and shortcomings, AI can deliver real services and real value to users and enterprises now.
• By contrast, the internet was barely able to deliver a slow, frustrating web browsing experience 25 years ago, and so it took far longer for all the use cases that we take for granted today to materialise.
• Consequently, even with its problems, AI can deliver meaningful revenues now, and so while it will not meet the lofty expectations being set by its creators, it will deliver far more than the Internet could in 2000.
• The net result is that when the correction comes, AI capacity will rapidly decrease in price, meaning that it is likely to end up being cheaper to buy in the dip as opposed to building it now.
• The problem is that the industry is so infested with FOMO (Fear Of Missing Out) that this strategy is currently inconceivable.
• I suspect that almost no one will be willing to wait and then purchase later, but this is how the best return on investment is likely to be made.
• Hence, the pick and shovels of AI are going to continue doing well in the short term, but the one I am really looking for is the one with the spine to hold off for now and then buy when the dip comes.