In recent earnings reports, two prominent artificial intelligence (AI) companies, ASML and Taiwan Semiconductors (TSM), delivered results that fell short of market expectations. This has sparked concerns about the future driving force of the AI market. In this article, we will delve into the performance of these companies and explore the implications for the broader market.
ASML’s Dominance in Semiconductor Manufacturing:
ASML, a Dutch semiconductor manufacturing equipment company, occupies a dominant position in the industry. It boasts cutting-edge chip manufacturing technology, responsible for producing the world’s most advanced chips, including those specifically designed for AI applications. In fact, ASML’s technology is instrumental in the manufacturing process of virtually all AI-specific semiconductors. Consequently, any slowdown in ASML’s earnings or order backlog raises concerns about the demand for AI semiconductors.Read More
In the chart below, we can see how the S&P 500 Index reacted the last three times these companies reported earnings. We could go back even further and see a similar pattern.
And the pattern is clear: The market took its cue from these two companies.
TSM’s Role as a Key Semiconductor Manufacturer:
Taiwan Semiconductor (TSM) is the world’s largest semiconductor manufacturer and happens to be ASML’s largest customer. While ASML focuses on chip manufacturing technology, TSM specializes in the manufacturing and packaging of semiconductors. Numerous semiconductor companies, both large and small, rely on TSM to manufacture some or all of their semiconductor designs. This is particularly true for AI-specific semiconductor companies, which tend to outsource their manufacturing to TSM. As a result, TSM’s earnings provide valuable insights into the demand for cutting-edge chips, including those used in AI research.
Market Reaction to Earnings:
Historically, the market has displayed a strong correlation with the earnings of ASML and TSM. Disappointing earnings from these companies have often led to market downturns, indicating the market’s sensitivity to their performance. The recent earnings reports from ASML and TSM have suggested the possibility of increased volatility in the market.
Assessing ASML’s Performance:
ASML’s unique position in the semiconductor supply chain, particularly its monopoly on extreme ultraviolet (EUV) lithography machines, makes it an integral part of the industry. These machines play a crucial role in etching circuit patterns onto silicon wafers, enabling the production of smaller and more efficient transistors. ASML’s recent introduction of high-NA lithography, a next-generation technology, further solidifies its dominance. However, ASML’s failure to meet its orders estimate indicates a potential short-term slowdown in semiconductor fabricators’ demand, which may impact the AI semiconductor market.
And ASML has a monopoly on the next generation of lithography, called high-NA lithography. (The “NA” stands for numerical aperture.) This optical system will get us to the 2nm node and below. The 2nm chips will be about 15% faster and use 30% less power consumption than 3nm semiconductors.
Here’s a picture of one of the new High-NA machines.
Source: Bloomberg
Examining TSM’s Earnings:
TSM’s significance lies in its production of approximately 50% of the world’s semiconductors, with a focus on advanced node semiconductors, including those used in AI-related applications. TSM serves as a manufacturing partner for various tech giants, producing chips for AI research, such as Nvidia’s GPUs, as well as chips for companies like AMD, Apple, Google, Meta Networks, and Amazon. TSM’s earnings are indicative of the overall demand for advanced chips. While AI-related chip demand remains robust, TSM noted a slowdown in other sectors, such as smartphones and automotive, due to factors like reduced consumer upgrades and declining governmental incentives.
Implications for the Market:
The AI trend remains in its early stages, and the demand for semiconductors to power AI applications continues to grow. However, meeting market expectations is no longer sufficient for sustaining the upward trajectory of AI-related tech stocks. Investors now anticipate substantial beats and higher guidance. Consequently, the market may experience increased volatility and a potential pullback. It is important to note that this breather in the market does not alter the overall AI trend, which is expected to drive significant transformations in the economy and the workplace.
Conclusion:
ASML and TSM’s recent earnings reports have raised concerns about the future trajectory of the AI market. While ASML’s missed orders estimate suggests a potential slowdown, TSM’s strong demand for AI-related chips indicates the continued growth of the AI trend. Nevertheless, the market’s expectations for exceptional performance and higher guidance have heightened volatility and may lead to a temporary market pullback. Despite this, the long-term outlook for AI remains promising, and investors should exercise caution while preparing to capitalize on potential buying opportunities during a market downturn.
