AI Continues to Drive Growth at Taiwan Semiconductor Manufacturing, but Is the Stock a Buy?

Core Viewpoint - Taiwan Semiconductor Manufacturing Company (TSMC) continues to show strong revenue and profit growth, driven by the increasing demand for artificial intelligence (AI) infrastructure, despite muted investor reactions to its recent earnings report [1][2]. Financial Performance - TSMC reported a 35% increase in revenue to $25.5 billion, with a gross margin expansion of 190 basis points year-over-year to 58.8%, despite challenges such as an earthquake affecting its Kumamoto facility [3]. - Earnings per American depositary receipt (ADR) surged 54% to $2.12, with net income in local currency jumping 60%, both exceeding analyst consensus estimates [4]. Revenue Composition - High-performance computing (HPC) accounted for 59% of TSMC's revenue, with HPC revenue rising 7% sequentially, compared to 46% a year ago [6]. - Revenue from advanced technologies (7nm and under) constituted 73% of total revenue, up from 65% a year ago, with the newest 3nm technology making up 22% of total wafer revenue, increasing from 9% [7]. Future Guidance - TSMC expects second-quarter revenue between $28.4 billion and $29.2 billion, indicating approximately 35% year-over-year growth at the midpoint, with gross margins projected between 57% and 59% [8]. - The company maintains a full-year revenue growth outlook of close to mid-20% levels and anticipates a 20% compound annual growth rate (CAGR) from 2024 to 2029, with a target gross margin of 53% [8]. Market Position and Strategy - TSMC has not observed changes in customer behavior due to tariffs and continues to see strong AI-related demand, expecting AI revenue to grow at a mid-40s percentage CAGR over the next five years [9]. - The company is strategically increasing its U.S. manufacturing presence to align with customer needs and mitigate trade policy concerns [11]. Valuation - TSMC's stock is considered undervalued, trading at a forward price-to-earnings (P/E) ratio of 16 based on 2025 estimates and a price/earnings-to-growth (PEG) ratio of less than 0.5, indicating potential for long-term investment [13].