AMD Warns: Taiwan Semi Lens Sees Upside At Qualcomm, Broadcom, Apple And Others

| About: Advanced Micro (AMD)
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Yesterday after the close, Advanced Micro Devices (NASDAQ:AMD) warned that its Q2 revenues would be down ~11% Q/Q vs prior expectations of +3% Q/Q (plus or minus 3%). This new guidance equates to revenue of ~$1.41B, which is ~13.5% below Street expectations of $1.63B.

In its press release, AMD stated that the shortfall was "primarily due to business conditions that materialized late in the second quarter, specifically softer-than-expected channel sales in China and Europe as well as a weaker consumer buying environment impacting the company's Original Equipment Manufacturer (OEM) business."

AMD's warning is not too surprising, given recent negative data points from other companies that sell primarily into the PC space (Micron (NASDAQ:MU) and Seagate (NASDAQ:STX)).

But how is AMD related to Qualcomm (NASDAQ:QCOM)?

The answer can be seen by taking a look at Taiwan Semiconductor, or TSMC (NYSE:TSM). TSMC, the world's leading semiconductor foundry, has as its primary customers QCOM, Broadcom (BRCM), AMD, Nvidia (NASDAQ:NVDA), and others. And due to TSMC's status as a public company in Taiwan, it reports sales results on a monthly basis.

TSMC is currently experiencing a huge revenue ramp. It just reported June unconsolidated revenues of NT$42.87B (-1.7% M/M, modestly below a 10-year average of +2.5%) -- the second highest all-time, following only May's results. (And prior to May, April results were the highest all-time).

TSMC's record results in two of the past three months are even more interesting because they did not just barely eclipse the previous high -- they crushed it. TSMC's previous all-time monthly revenue record was NT$37.37B, set in October of 2010. Thus the April, May, and June monthly revenues beat the previous high by anywhere from ~7.1% to ~16.7%.

TSMC's quarterly unconsolidated revenue of NT$126.5B was in line with management guidance, and represented the highest quarterly revenue that TSMC has ever reported by a wide margin (beating Q3:2009 by nearly 15%). To put the uptick in further perspective, TSMC's implied Q/Q revenue growth of +21.3% has been eclipsed just once in the past nine years -- and that was the extraordinary +91.7% Q/Q result posted in Q2 of 2009, when the entire industry was coming out of the bottom following the 2008 meltdown.

These beats are all the more noteworthy because of the very high absolute levels. TSMC is the world's largest semiconductor foundry. Its June revenues were nearly 5x that of its competitor, UMC. TSMC is building a massive amount of product, more so than at any other time in its history.

What is driving TSMC's strength?

Clearly not AMD. AMD is a mid-single digit customer of TSMC. Nor is it Texas Instruments (NYSE:TXN); TXN is a significant TSMC customer, accounting for perhaps 2-3% of its revenues. TXN narrowed its Q2 guidance on its mid-quarter revenue update back on June 11, so it is not responsible for TSMC's strength. That leaves major TSMC customers such as QCOM, BRCM, and NVDA.

Let's look at NVDA, which accounts for a mid-to-high single-digit percentage of TSMC's revenues. Back in mid-May, NVDA actually guided its next quarter's revenue higher -- its midpoint of $1.02B was at the time about 4% higher than Street expectations of $976.3M. But NVDA's bread and butter is still the PC market -- whose weakness is evidenced by negative data from MU, STX, and AMD -- and in absolute terms, NVDA's upside is only about $25 million. TSMC, on the other hand, reported May revenues that were roughly $234.2 million higher than March on a U.S. dollar basis.

Other, smaller TSMC customers are unlikely the source of TSMC's strength, not only because of the smaller size individually, but in aggregate, most end markets are somewhat sluggish. That leaves BRCM and QCOM, each of which accounts for a high single-digit percentage of TSMC's revenues.

BRCM has significant exposure to both AAPL (low teens %) and Samsung (roughly 10%), which are the likely source of the strength, given recent data. QCOM also has significant exposure to both: it has a mid-teens percentage exposure to Samsung, and a high single-digit (and growing) exposure to AAPL.

If the source of this strength at TSMC is AAPL, then that would bode well for a host of other suppliers with a significant dependence on AAPL, including CRUS (~60% from AAPL), TQNT (~35%), SWKS (~15%), and AVGO (high single digits).

We'll have more data when Hon Hai (2317.TT) reports June revenues, any day now.

Disclosure: I am long TQNT, CRUS.