What happened
Shares of United Microelectronics (NYSE: UMC) have popped today, up by 15% as of 11:20 a.m. EST, following a report from DIGITIMES suggesting that the company and larger rival Taiwan Semiconductor would see strong capacity utilization for a specific production process in the quarters ahead. The higher utilization is also expected to boost profitability.
So what
Both semiconductor companies should be able to maintain full capacity utilization for 28-nanometer manufacturing at each company's respective 8-inch and 12-inch fabrication facilities, known as fabs, through the third quarter of 2021, according to the report. Gross margins for that production node are expected to reach new highs thanks to strong demand from customers.
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Since chip foundries are extremely capital intensive to build and operate, higher capacity utilization spreads out the fixed costs over more units and improves overall profitability. Compared to state-of-the-art production nodes like 5-nanometer or 7-nanometer -- where United Microelectronics does not compete -- 28-nanometer manufacturing processes are relatively more mature.
Now what
United Microelectronics gave up on 7-nanometer technology years ago and instead decided to focus primarily on 14-nanometer and 28-nanometer production. In the third quarter, 28-nanometer products represented 14% of revenue.
"In addition to demand stability across various end markets, our 28-nanometer revenue grew quarter-over-quarter as customer product tape-outs [the final stage of chip design] continued throughout the quarter," United Microelectronics exec Jason Wang noted on the last earnings call. "Moving forward, we expect to see a sustained increase in the number of 28-nanometer tape-outs, which will further diversify our 28-nanometer exposure to end markets and customers."
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Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
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