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Apple Read From TSMC: Expect Softness Followed by Strength
Apple, Companies

While I don’t want to overplay commentary from any one of Apple’s partners, I think it’s critical for investors to track TSMC updates given that Apple accounts for 25% of their revenue. TSMC produces the chips at the heart of most of Apple’s devices, including the iPhone.

TSMC reported its December results and provided guidance for the March quarter and FY2023. I believe these results suggest that Apple’s March and June quarters may fall slightly below Street expectations while the back half of the year will exceed expectations. Despite caution on the first half of the year, TSMC investors concluded that the company’s commentary for 2023 as a whole would be positive (the stock rose 6% after the report).

I’m now expecting a soft outlook from Apple on February 2nd. Still, I think that dip will be fractional and short-term. Mirroring TSMC’s outlook for 2023, I expect iPhone revenue growth to slightly exceed the current Street expectations of a 0.3% year-over-year decline.

Therefore, I believe the takeaway for investors will be that the iPhone franchise and its long-term growth prospects absolutely remain intact.

“Overall macroeconomic conditions remain weak”

TSMC opened its outlook with a reminder that “overall macroeconomic conditions remain weak” and cautioned investors to expect the “business to be further impacted by continued market end demand softness.” That tone is more cautious than the company’s outlook three months ago.

Another layer of complexity in TSMC’s guidance is that the company expects channel inventory to be drawn down in the first half of this year and to refill in the back half of the year. This suggests that TSMC’s first half will likely prove to be worse than Apple’s first half of 2023 given TSMC has already sold chips that customers will use over the next several months.

TSMC’s back half of the year will likely prove to be stronger given it will fill the channel with sales of its 3-nm chips later this year. That chip will likely power the higher-end iPhone 15 models in Fall 2023.

TSMC guidance suggests June should mark the bottom

The iPhone will account for just over half of Apple’s revenue in FY23. It’s worth looking closer at TSMC’s smartphone segment because it more closely maps to iPhone results. The takeaway from this segment’s outlook is that business is slowing. Growth was up 27% in September 2022 and 9% in December 2022. The guidance for March suggests that TSMC’s smartphone segment will be down around 3%.

The Street is looking for iPhone growth in March to be down 0.3% y/y. Typically, TSMC’s smartphone segment grows faster than iPhone revenue, which suggests slight downside to the iPhone in March. For the June quarter, analysts expect iPhone revenue to be down 1.2% y/y, compared to TSMC commentary indicating a 13% decline. Keep in mind TSMC’s channel inventory drawn down likely accounts for a measurable part of the y/y decline.

Reason for optimism in full 2o23

For the September quarter, analysts expect iPhone revenue to be up 3.4%, which feels conservative given the back half of the year optimism we are hearing from TSMC. As mentioned, for FY23, I expect iPhone revenue growth to slightly exceed the current Street expectations of a 0.3% y/y decline.

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