Taiwan Semiconductor’s Stock Rated Overweight Ahead of Q3 Earnings

Taiwan Semiconductor Manufacturing (NYSE:TSM), the world's leading contract chipmaker, reported a robust profit for the first quarter, surpassing expectations due to rising demand from the burgeoning artificial intelligence sector.

TSMC announced a net income of T$225.49 billion for the quarter ending March 31, exceeding Wall Street projections of T$218.1 billion ($6.7 billion) and marking an increase from last year's T$206.99 billion. Earnings per share for the quarter were T$8.70, or $1.38 per American Depository Receipt, up from $1.31 the previous year.

However, the quarterly comparison showed a 5.5% drop in net income, suggesting a slight cooling in demand compared to the peak levels of 2023. The company is also facing rising costs as it ramps up investments in chip development, with capital expenditures climbing to $5.77 billion in the first quarter from $5.24 billion in the previous quarter.

Revenue for the quarter grew 16.5% year-on-year to T$592.64 billion, aided partly by a weak Taiwan dollar which enhanced dollar-denominated earnings.

This financial performance is particularly noteworthy as TSMC's results are often viewed as a barometer for global chip demand due to its critical position in the semiconductor industry.

Taiwan Semiconductor Manufacturing (NYSE:TSM) reported a significant increase in its March sales, attributed largely to the growing demand for chips fueled by advancements in artificial intelligence. TSMC's sales for March soared by 34% from the previous year, reaching T$195.21 billion ($6.1 billion), and saw a 7.5% rise from February's figures.

This surge led to a first-quarter total of T$592.64 billion in sales, marking a 16.5% increase year-on-year. It's important to note that this substantial growth was partly due to the low sales base in 2023, when TSMC faced weaker chip demand. The latter half of 2023, however, began showing signs of recovery, driven by AI-related demand.

As the world's leading contract chipmaker, TSMC supplies major tech companies, including NVIDIA Corporation and Apple. NVIDIA, in particular, has significantly contributed to TSMC's demand, thanks to the processor manufacturer's focus on AI-driven chip development. The heightened interest in AI has recently propelled TSMC's valuation to new heights, with plans underway to expand its major chipmaking facility in Phoenix, Arizona.

Taiwan Semiconductor Manufacturing (NYSE:TSM), the world's leading contract chipmaker, announced its fourth-quarter revenue of T$625.5 billion ($20.10 billion). While this figure shows a largely flat performance, it has still managed to exceed market expectations. The reported Q4 revenue also went beyond TSMC's earlier projection range of $18.8-19.6 billion.

In December, TSMC observed a year-on-year revenue decrease of 8.4%, bringing in T$176.3 billion.

Commenting on these results, Wedbush analysts noted that this outcome aligns with previous expectations of a strong fourth quarter for TSMC. The performance was attributed to various factors, including seasonal demand associated with Apple, increased demand for AI solutions, and improved dynamics in the Chinese handset market.

Morgan Stanley's analysts maintained their Overweight rating on Taiwan Semiconductor Manufacturing (NYSE:TSM) ahead of its Q3/23 earnings announcement, scheduled on October 19.

While some investors express concerns regarding the broader economic landscape and potential extended semiconductor downturn, Morgan Stanley anticipates the company's Q4/23 revenue guidance might exceed expectations. This optimism stems from strong demand for AI semiconductors and urgent orders from Android smartphone and PC CPU brands like MediaTek and AMD. The analysts predict a 10% quarter-over-quarter growth in Q4/23 revenue and anticipate a gross margin surpassing 53%.