Probably The One Monthly Report To Look Out For

If one is a technology sector investor, especially among the hype of artificial intelligence (AI), one monthly report would likely be of interest to those vested. That report is the monthly revenue report of Taiwan Semiconductor Manufacturing Company, better known as TSMC.

 

Screenshot taken from TSMC 2020 Annual Report cover

While monthly reporting is a rarity in the United States or in our local markets, it is a mandatory requirement imposed on companies listed in Taiwan. With TSMC being bounded by this rule, and its importance in producing the chips powering the technology sector/industry and the current AI trend, the reports come in useful as a leading indicator of its clients’ potential earnings.

TSMC’s customer base is relatively concentrated on a few players that we know: Apple, Nvidia, Broadcom, etc., and these companies are driving the AI narrative. Hence, an increase in TSMC revenue means that the customers are demanding more of its manufactured chips, right?

Well, not really. Increased revenue from providing chips downstream may not translate to customers selling more products or services utilising the chips. A couple of reasons explain why this is so.

The first is stockpiling: a customer may be building up its inventory in anticipation of future demand, so these do not translate as additional profits reported. Next is pricing: with chips, especially the higher end ones, an increase in price with the same quantity ordered could be seen as revenue increase on the surface.

Still, the blog post about TSMC’s monthly revenue report brings forth one of the concepts of the Bedokian Portfolio: associative investing¹.

In associative investing, the view is that every factor and component in the markets and economy are related to one another to a certain degree. In TSMC’s case, its downstream effects may play a part in the customers’ earnings, while its upstream players such as the suppliers may see increased revenues if TSMC orders more raw materials and parts. Sidestream wise, one could observe the competitors and their financials; if everyone is earning, it means the general inclination is the sector/industry that is supporting is likely expanding.

While TSMC’s monthly revenue report serves as a high-frequency, invaluable barometer for the health of the AI supply chain, interpreting it requires nuance. By looking beyond the headline numbers to account for lead times, pricing shifts, and ecosystem ripple effects across upstream suppliers and downstream clients, investors can effectively apply associative investing to gain a clearer, well-rounded edge in the technology sector.

Disclosure

The Bedokian is vested in Apple, Nvidia and Broadcom.

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Disclaimer

1 – The Bedokian Portfolio (2^nd Ed), p137-138