What the ASML and TSMC results tell us about demand for AI chips

• The latest blow in AI's journey was a negative earnings report from ASML, which sent the company's shares plummeting.
• But ASML's biggest customer, Taiwanese chipmaker TSMC, reported blockbuster results on Thursday.
• Analysts told BI that this suggests continued AI chip growth in the short to medium term.

Two days is a long time in the chip world. On Tuesday, the semiconductor market was weak after disappointing results from ASML, the Dutch company that makes the machines used to make chips.

Until Thursday, Taiwan Semiconductor Manufacturing Company, the world's largest chipmaker, painted a different picture with its earnings: The AI-driven chip boom is far from over.

The roller coaster returns can be explained by several factors. These primarily include the respective customers of TSMC and ASML.

ASML sells large lithography machines – which print circuit patterns on silicon wafers – to chipmakers including TSMC, Samsung and Intel.

The latter two companies have had problems of their own that are impacting the entire chip market.

Intel, once the world's largest chipmaker, has made an attempt to turn around the business, including laying off 15,000 people. And in early October, Samsung apologized for its poor financial performance.

“Intel and Samsung are falling behind TSMC from a technology perspective,” Javier Correonero, equity analyst at Morningstar, told Business Insider. “These are just customer-specific issues with Intel and Samsung not being able to spin up new nodes properly, but that has nothing to do with demand.”

TSMC is now a competitor to Intel and Samsung. Its customers include Nvidia, the GPU developer leading the AI ​​chip boom, as well as AMD and Qualcomm. This makes TSMC a good indicator of AI chip demand.

TSMC reported a 54% rise in third-quarter net profit to a record 325.3 billion new Taiwan dollars, or $10.1 billion. The above-forecast results were driven by strong demand for AI despite ongoing questions about it Return on investment of technology.

In contrast, ASML, Europe's most valuable technology company, cut its forecasts for next year, sending its shares tumbling 16%, their biggest one-day decline since 1998. Other chip stocks followed, with Nvidia falling nearly 5% and AMD falling 5.3%. , and Broadcom fell 3.5% around midday Tuesday. Its shares stabilized on Wednesday.

Another factor is that chipmakers have increased their production capacities to meet increasing demand during the pandemic. Now chipmakers like Intel, Samsung and TSMC have withdrawn their ASML orders because they realize they have enough capacity. Dan Hutcheson, vice chairman of analyst firm TechInsights, told Reuters.

It's also important to recognize that not all chips are suitable for AI – and weaker demand in other areas such as PCs can slow growth.

“It is important to note that semis have many sub-segments, and while some sub-segments may be at the bottom (e.g. PCs), others may be at the top (AI), making it difficult to predict where overall demand will fall “It will be 18 months,” said Correonero.

The demand for AI remains high

In a conference call on Thursday, TSMC CEO CC Wei reassured investors that the company's growth is real and dismissed that AI is in a bubble.

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“That’s a noticeable ROI benefit,” he said in response to a question from JPMorgan analyst Gokul Hariharan. “We cannot be the only company that has benefited from this AI application. So I think a lot of companies are currently using AI and continuing to improve their productivity, efficiency and everything.”

Currently, investors seem to favor faster-growing companies like TSMC.

“It looks like TSMC appears to be in a better position for now, supported by its faster growth rate,” Correonero said.

“TSMC appears to be more aligned with Nvidia and others, where demand has held up much better in recent months and is actually showing signs of recovery after a mixed summer,” he added.

While a slowdown in ASML might warrant caution, the overall picture still points to a continued increase in AI demand.

“In the short to medium term, AI applications, data centers and advanced chips are still driving strong demand,” said Kate Leaman, chief market analyst at AvaTrade. “While ASML may experience a temporary slowdown, companies like TSMC could continue to deliver strong results thanks to these high-growth areas.”

As other chip companies such as Qualcomm and Intel release their results in the coming weeks, a clearer picture of the market will emerge.

“Right now, the AI ​​boom appears to be driving solid growth for chipmakers,” Leaman added.