TSMC's Record Quarter: The Numbers Wall Street Is Overlooking

Core Viewpoint - Taiwan Semiconductor (TSMC) reported a strong quarter with $16 billion in profit and 35% year-over-year growth, positioning itself as a leader in the AI chip market, prompting analysts to raise price targets [1][2] Business Model Shift - TSMC is undergoing a fundamental shift in its business model, moving away from traditional revenue generation methods and customer reliance [2] - The company has implemented tiered price increases of 3-10% across its advanced nodes, reflecting its strategic pricing approach [3][4] Customer Segmentation - High-performance computing and AI customers face price increases near the 10% ceiling, while smartphone processor clients see hikes closer to 5%, indicating a bifurcation in TSMC's customer base [4][7] - Nvidia's CEO supports these price hikes, viewing TSMC's chips as underpriced, while Qualcomm and MediaTek face higher effective cost increases of 16% to 24% [5][6] Changing Dynamics with Apple - Apple's spending with TSMC is projected to grow from $2 billion in 2014 to $24 billion in 2025, but its share of TSMC's total revenue has decreased from 25% to 20% [10] - By late 2027, Nvidia is expected to consume more cutting-edge 3-nanometer wafers than Apple, marking a significant shift in TSMC's customer dynamics [10] Capacity Constraints - TSMC's advanced-node capacity is currently "about three times short" of customer demand, limiting its ability to meet market needs [14] - The company projects 30% revenue growth in 2026, driven by maximum output capacity rather than market demand [17] Future Challenges - The transition to 2-nanometer chips is expected to take longer than previous transitions, with projections suggesting a ramp-up period closer to three years [19] - TSMC's gross margin of 62.3% in Q4 is overshadowed by rising capital expenditures, which are growing at 32% year-over-year, potentially compressing return on invested capital [21][23] Investment Considerations - TSMC is viewed as a strong player in the technology sector, but the investment thesis has evolved, with the stock market pricing in an optimistic scenario that may not fully account for underlying risks [24][26] - Investors should monitor gross margin realization, utilization rates at new facilities, and customer dynamics to assess future performance [25]