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TSMC's $420 Billion Market Rally Driven by AI Boom
The ongoing surge in artificial intelligence investments continues to bolster Taiwan Semiconductor Manufacturing Co.’s (TSMC) extraordinary $420 billion market rally this year. As the world’s premier contract chipmaker, TSMC is expected to report a significant 29% increase in second-quarter net income. Analysts, including those from major financial institutions like JPMorgan Chase & Co. and Morgan Stanley, anticipate that TSMC will revise its full-year sales outlook upward, further enhancing its market valuation.
Strong Quarterly Earnings Expected
TSMC has emerged as a prime investment for AI-driven growth, much like Nvidia Corp. Unlike its few competitors, TSMC’s state-of-the-art technology advantages provide it with the leverage to raise chip prices amid flourishing demand. Consequently, analysts have been adjusting their valuation and price targets, with the company recently reaching a $1 trillion market capitalization in the US.
Jian Shi Cortesi of Gam Investment Management notes, “Investors realized that TSMC is the ‘pick and shovel’ play on the AI theme,” predicting sustained AI demand over the next few quarters as the market for AI chips remains robust.
Revenue and Profit Margin Boosts
Previously, TSMC projected a low-to-mid 20% growth in full-year revenue. However, given the better-than-expected June quarter performance and strong earnings reports from competitors like Samsung Electronics Co. and Broadcom Inc., this forecast now appears conservative. TSMC reported a 40% increase in second-quarter sales, surpassing the average analyst forecast of 36%.
This performance has driven investor optimism, leading to a significant rise in the stock’s valuation. From an initial 13 times its 2025 price-to-earnings forecast at the start of the year, TSMC’s valuation has surged to 21 times. Analysts believe demonstrating enhanced profit margins will push this figure even higher.
Kevin Wang of Mizuho Securities Asia Ltd remarked, “The acceleration of earnings growth should drive the re-rating of valuation.” He also noted that if TSMC’s margins improve further, earnings could potentially grow by 25% to 30%, expanding the valuation to at least 25 times.
Investor Sentiment and Market Trends
Investor focus will be on TSMC's earnings call to glean insights on the chip market recovery and AI demand trends. Rising AI chip orders have mitigated the effects of tepid smartphone sales, which are now showing signs of recovery. Enhanced demand for high-end smartphones and high-performance computing products could lead to price hikes for TSMC’s advanced semiconductors. JPMorgan forecasts potential price increases of 3% to 6% across various customer segments for TSMC’s top-tier chips.
JPMorgan analysts, including Gokul Hariharan, predict that a mid-single-digit price hike on over 50% of TSMC’s revenue could contribute significantly to gross margin improvements, estimating a jump in gross profit margin to 58% in 2025, surpassing consensus estimates. However, some investors are cautious, as evidenced by net sales of TSMC shares by foreign investors over five consecutive sessions.
Despite this, Robert Cheng from Bank of America points out, “Right now, everything is in shortage along the AI supply chain. Taiwan semiconductor stocks’ valuation is not high. Share prices have gone up a lot, but they have earnings to support.” This sustained earnings potential solidifies TSMC’s compelling investment appeal amidst the AI boom.
