TSMC’s Second Quarter Results May Fuel Its $420 Billion Rally as AI Demand Soars

(Bloomberg) — Taiwan Semiconductor Manufacturing Co.’s $420 billion equity rally this year will get a valuation test next week when it reports earnings, with analysts expecting the chipmaker to raise full-year sales forecasts.

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The world’s biggest contract chipmaker will probably report a 29% increase in second-quarter net income on Thursday, according to the median estimate of analysts surveyed by Bloomberg. More importantly, analysts from JPMorgan Chase & Co. to Morgan Stanley expect it to also raise its full-year sales guidance, justifying another round of valuation expansion.

Just like Nvidia Corp., TSMC has become a favorite artificial intelligence-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 $1 trillion market capitalization in the US earlier this week.

“Investors realized 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 Inc.’s most advanced chips had previously guided for full-year revenue to grow by low-to-mid 20%. 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 Co. and major customer Broadcom Inc.

On Wednesday, TSMC indicated that sales in the second quarter had jumped by 40%, compared with the average forecasts for a 36% rise. That’s helping to drive expectations among investors.

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 Ltd, who raised his target price on the Taiwan-listed stock by 17% this month. “The margin improvement could drive earnings to grow 25% or even 30%, so the valuation could also expand to at least 25 times.”

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Investors will be scrutinizing 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 lackluster smartphone sales, which are only just recovering from a slump. Shares of TSMC traded 0.3% higer in New York trading at 9:46 a.m. on Friday.

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% for various customers for its most advanced chips.

“With a mid-single digit price hike across over 50% of revenues, this should also contribute over 100bps of gross margin uptick in 2025,” JPMorgan analysts including Gokul Hariharan wrote in a note dated July 7. They expect gross profit margin for TSMC to jump to 58% 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 through Thursday, according to data from the Taiwan stock exchange.

Its market capitalization now far exceeds the combined size of all the Latin American companies on MSCI Inc.’s emerging markets benchmark that is tracked by millions of 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.”

–With assistance from Argin Chang and Betty Hou.

(Updates with share-price move in ninth paragraph.)

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