Ever since the rise of ChatGPT and competitors from big tech companies like Meta, Alphabet or X, generative AI has become the newest golden goose of the industry, Statista reports.

Some experts claim this specific AI trend bubble is bound to burst soon or that it is “useless”, as one market analyst said in a recent interview with Fortune. As of now, the financial results of companies like Nvidia, which has strengthened its focus on its data centre segment in the past two years, tell a different story. The same goes for Nvidia’s chief business partner, the semiconductor manufacturer TSMC.

The Taiwanese company offers foundry services, meaning it builds chips for companies that are unable or unwilling to do so themselves. This business was lucrative before the pandemic, but was accelerated in the post-pandemic AI push. As TSMC annual reports and data from CompaniesMarketCap.com show, TSMC had a market cap of $287bn at the end of 2019 and generated $11.5bn of annual income from revenues of $35.7bn in the same year. Two years later, profits and market cap had doubled, while revenues increased by $22bn.

While many other tech companies generate higher revenues, TSMC’s profit margin was significantly above the average in the semiconductor industry. According to CSIMarket data, the net margin for semiconductor companies stood at 22.5% for the fourth quarter of 2023, while TSMC exhibited a margin of 38.2%.

On July 18, TSMC released its full results for the second quarter of 2024, having already generated more revenue and income in six months than it did for the full year five years prior. 52% of its second-quarter revenue was generated in the high-performance computing segment, which includes chips for data centres, supercomputers and AI solutions, while 33% was from chips for smartphones. The former segment saw a quarter-on-quarter increase of 28%, while the latter stagnated compared to the first three months of 2024.

If TSMC’s outlook holds, the company might be well on its way to top its 2022 record highs in revenue and income by the end of 2024. For the third quarter alone the company published a revenue guidance of $22.4bn to $23.2bn. This would push the semiconductor foundry far beyond its results for the year of 2021.

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TSMC and Samsung dominate

Due to the success of companies like Nvidia or OpenAI, many people know about the AI arms race, the corresponding hype bubble and the chips required to power the underlying data centres. Fewer people know that even though Nvidia sells AI-focused products like their A100, H100 or B100 data centre platforms, they don't produce the semiconductors themselves. This task falls to TSMC, a chip foundry from Taiwan. Foundries manufacture all kinds of semiconductors for companies that can't or won't produce chips themselves. And in the field of semiconductor foundries, no other company even comes close to TSMC's dominance.

Data from Counterpoint Research shows that in the first quarter of 2024 TSMC had a revenue-based market share of 62%. This is unsurprising, as TSMC has been manufacturing chips for Nvidia for decades and the latter is struggling to keep up with increasing demand for its hardware that is powering the AI gold rush. "We’ve observed more evidence to support that the AI demand is real, with increasing Capex of cloud service providers adopting the AI hardware first and the following would-be enterprises", says Counterpoint Research analyst Adam Chang. "We expected the demand for AI to remain strong in 2024, and probably more upsides in 2025. However, non-AI demand remained sluggish, but we think the inventory set-up is promising after several quarters of de-stocking." While it's unclear when the dam on this particular hype will break and what this will do to the bottom lines of both TSMC and Nvidia, it's unlikely that the former's market share will take any major hits. Historically, TSMC has had a foundry market share upwards of 50% since at least mid-2021, four times as big as its biggest competitor Samsung Foundry. However, Samsung's foundry market share needs to be taken with a grain of salt since they also produce the chips for their products.

Notably, roughly 80% of all semiconductor foundry revenue is split between South Korean and Taiwanese companies, with GlobalFoundries from the US achieving a share of 8 to 6% over the last three years. One of the more interesting stories of recent months is the rise of SMIC, which, according to Counterpoint Research's first-quarter analysis, now ranks third in worldwide foundry revenue. This is despite the United States imposing strict export restrictions of advanced semiconductors to China and considering even tighter control of the People's Republic's access to such technologies. According to the 2024 factbook of the Semiconductor Industry Association, a US lobby group, China had a 29% market share in worldwide semiconductor sales in 2023 and was responsible for 53% of semiconductor sales in the Asia-Pacific region in the same year.

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