Taiwan Semiconductor Manufacturing Company (TSMC), the dominant maker of the world's most advanced chips, is in bullish mood.

On the back of another robust set of quarterly financials (Q4 FY21) and a strong balance sheet, TSMC is upping once again its capex budget. By doing so, it hopes to be better placed to exploit future market growth.

"We are witnessing a structural increase in underlying semiconductor demand underpinned by the industry megatrends of 5G-related and HPC [high-performance computing] applications," explained TSMC CTO Wendell Huang, speaking on the company's Q4 earnings conference call.

The CFO said the capital budget for 2022 was slated at between $40 billion and $44 billion, well up on the $30 billion splashed out in 2021. TSMC's capex in 2019, by way of comparison, was $14.9 billion.

Huang said between 70% and 80% of the 2022 budget will be allocated to "advanced process technologies" including 2-nanometer (nm), 3nm, 5nm and 7nm. "About 10% will be spent for advanced packaging and mask making," he added, "and 10% to 20% will be spent for specialty technologies."

TSMC should have no trouble in funding its largesse on advanced chips (7mn and below). "With $38 billion in cash and $40 billion in operating cash flow before capex, TSMC can afford to take some risk," said Richard Windsor at analyst firm Radio Free Mobile. "The sheer size of its investments in 2022 demonstrates that TSMC is intent on leaving its rivals in the dust come what may."

Windsor argued, however, that the cyclical semiconductor industry had most likely reached a peak. "The return on these investments will be felt over a period of years, meaning that TSMC thinks that the industry is in a period of secular expansion with no real dip in sight," he said. "This is precisely the view that when uttered by semiconductor companies is most often an indicator of a peak in the semiconductor cycle."

Thin wafers, fat margins

Shipments of 5nm during Q4 accounted for 23% of TSMC's total wafer revenue, while the 7nm share was 27%. It meant that advanced technologies (7nm and below) accounted for 50% of total wafer revenue, up from 41% in 2020.

Moreover, TSMC continues to post very respectable margins. Gross margin for Q4 was 52.7%, operating margin was 41.7%, and net profit margin came in at 37.9%. Revenue for the quarter, at $15.74 billion, was a 24.1% jump year-over-year (and up 5.8% compared with the previous quarter).

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"Moving into first quarter 2022, we expect our business to be supported by HPC-related demand, continued recovery in the automotive segment, and a milder smartphone seasonality than in recent years," said Wuang in prepared remarks.

TSMC is guiding for Q1 FY22 revenue of between US$16.6 billion and US$17.2 billion. Based on the exchange rate assumption of 1 US dollar to 27.6 NT dollars, gross profit margin is expected to be between 53% and 55%, while operating profit margin is guided at between 42% and 44%.

— Ken Wieland, contributing editor, special to Light Reading