TAIWAN Semiconductor Manufacturing Company’s (TSMC) US$420 billion rally this year may get supercharged by another strong quarterly earnings, as an artificial intelligence (AI) investment boom keeps beating expectations.
The world’s biggest contract chipmaker will probably report a 29 per cent increase in second-quarter net income on Thursday (Jul 11), according to the median estimate of analysts surveyed by Bloomberg. More importantly, analysts from JPMorgan Chase to Morgan Stanley expect it to also raise its full-year sales guidance, justifying another round of valuation expansion.
Just like Nvidia, TSMC has become a favourite AI-bet for investors with few other competitors able to duplicate its cutting-edge technology. That’s giving it the bargaining power to raise prices for its advance chips as demand blossoms. Analysts have been playing catchup in valuation and price targets, with the company surging to hit a US$1 trillion market capitalisation in the US earlier this week.
“Investors realised that TSMC is the ‘pick and shovel’ play on the AI theme,” said Jian Shi Cortesi, a portfolio manager at Gam Investment Management, whose biggest fund has the stock as its top holding. “In my view, the AI demand can sustain for at least the next few quarters as the demand for AI chips is currently showing no signs of slowing down.”
The sole supplier of Nvidia and Apple’s most advanced chips had previously guided for full-year revenue to grow by low-to-mid 20 per cent. That’s increasingly seen as too cautious, especially after its sales beat for the June quarter and earnings reported by competitors such as Samsung Electronics and major customer Broadcom.
On Wednesday, TSMC indicated that sales in the second quarter had jumped by 40 per cent, compared with the average forecasts for a 36 per cent rise. That’s helping to drive expectations among investors.
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At the start of the year, the Taiwan-listed stock was valued at 13 times its 2025 price-to-earnings forecast. In the space of six months, that has jumped to 21 times. Proof that TSMC is improving its profit margins will elevate that further, analysts said.
“The acceleration of earnings growth should drive the re-rating of valuation,” said Kevin Wang, an analyst at Mizuho Securities Asia, who raised his target price on the Taiwan-listed stock by 17 per cent this month. “The margin improvement could drive earnings to grow 25 per cent or even 30 per cent, so the valuation could also expand to at least 25 times.”
Investors will be scrutinising TSMC’s tone at the earnings call for further clues on the recovery in the chip market and AI demand trends. The AI chip orders have helped make up for lacklustre smartphone sales, which are only just recovering from a slump.
A pick up in demand for high-end smartphones and product upgrades in high-performance computing may lead to a price hike of the more advanced semiconductors. JPMorgan estimates that TSMC may raise prices by 3 to 6 per cent for various customers for its most advanced chips.
“With a mid-single digit price hike across over 50 per cent of revenues, this should also contribute over 100bps of gross margin uptick in 2025,” JPMorgan analysts including Gokul Hariharan wrote in a note dated Jul 7. They expect gross profit margin for TSMC to jump to 58 per cent next year, higher than consensus estimates.
Still, there are signs that some have grown uneasy with its valuation. Foreign investors were net selling the shares for five consecutive sessions to Thursday, according to data from the Taiwan stock exchange.
Its market capitalisation now far exceeds the combined size of all the Latin American companies on MSCI’s emerging markets benchmark that is tracked by millions of US dollars in global funds, according to Bloomberg calculations.
“Right now, everything is in shortage along the AI supply chain,” said Robert Cheng, a Taipei-based analyst at Bank of America. “Taiwan semiconductor stocks’ valuation is not high. Share prices have gone up a lot, but they have earnings to support.” BLOOMBERG
