Should You Buy Taiwan Semiconductor Before January 16th?

Investing

Published: January 13, 2025 12:53 pm

Taiwan Semiconductor Manufacturing (NYSE:TSM) is the straw that stirs the artificial intelligence drink. As the world’s biggest pure play semiconductor foundry, it is the company the leading global AI chipmakers turn to to produce their chips.

Unsurprisingly, revenue and earnings have been robust for 2024 and the stock responded in kind, nearly doubling in value. While not nearly as good as Nvidia (NASDAQ:NVDA), which relies on TSM for nearly all of its chips, the chip foundry seems well positioned for the future as AI is still in its infancy.

With Taiwan Semiconductor reporting fourth quarter results on Thursday, Jan. 16., what can investors expect from the chip giant?

24/7 Wall St. Key Points:

Taiwan Semiconductor Manufacturing (TSM) is scheduled to report earnings on Jan. 16.
Preliminary sales data indicates it met management’s guidance for the quarter, with sales rising 39% year-over-year.
Strong demand from hyperscalers for AI chips has kept TSM moving higher, even as trade relations with China sour.
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3D illustration of glowing blue "AI" text on a computer chip, dark background with circuit board texture. — Demand for AI chip’s has been the wind at the back of Taiwan Semiconductor Manufacturing

As the largest foundry with a 60% share of the market, Taiwan Semiconductor Manufacturing is benefiting from AI and high-performance computing, both with tailwinds that could last decades. Because of its investments in cutting edge technology and its economies of scale, TSM is able to charge premiums for its services that should continue to bolster gross margins.

Demand from hyperscalers like Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Meta Platforms (NASDAQ:META), and Microsoft (NASDAQ:MSFT) for the leading processing technologies for their systems ensures they will continue turning to TSM, which is building out more capacity to meet the demand.

Because the semiconductor industry is cyclical, and busts do follow booms like we’re in, the excess capacity the foundries carry can hurt profits in a downturn. But demand is burgeoning right now and TSM needs the added capacity to meet demand.

What about Biden administration export controls?

New trade war between the United States and China, various tariffs, illustration of American and Chinese flags facing each other, trade war concept — While tensions between the U.S. and China continue to run high, the fall out so far hasn’t hurt TSM’s business

The latest trade crackdown by the Biden administration on China focuses on limiting the country’s ability to access high-bandwidth memory, along with the equipment, software, and controls that are needed to make it.

Fortunately for Taiwan Semiconductor, the rules have little impact on foundries. Revenue for TSM, United Microelectronics (NYSE:UMC), and GlobalFoundries (NASDAQ:GFS) mostly come from U.S. companies and they have little exposure to China. What little they do have comes from less advanced silicon.

Taiwan Semiconductor has sought to head off any potential ill will by expanding manufacturing into the U.S. While it’s smart business, since this is where most of its customers are so having manufacturing closer to the end user can save costs, in any industry downturn, not even the added facilities can save it from the added cost pressures of its far-flung operations.

So far, so good

Management guided revenue to a range of $26.1 billion to $26.9 billion, generating gross margins of 57% to 59%, and operating margins of 46.5% to 48.5%. Last quarter exceeded its guidance on all counts, and margins by an appreciable amount.

Based on the monthly sales reports TSM publishes, it looks as though it met its sales guidance with revenue of $26.3 billion, based on current exchange rates. It represents a 39% increase over the year ago figure. For the year, the chipmaker reported revenue of $87.8 billion, a 34% increase.

Taiwan Semiconductor Manufacturing has largely met revenue expectations this year, so this is not out of line with its previous quarterly reports. Profits, though, have tended to significantly beat expectations and it wouldn’t be surprising to see that happen again. That could be the start the chip foundry needs to reach a $2 trillion valuation in 2025.