Taiwan Semiconductor Manufacturing (TSM), or TSMC, continues to ride the AI wave, which led to strong growth in Q3. Building on a stellar second-quarter performance, TSMC’s July and August sales reports confirm that the semiconductor powerhouse is reaping the rewards of its leadership in cutting-edge chip technology. As AI adoption accelerates across industries, from high-performance computing to smartphones, TSMC’s vital role in the semiconductor supply chain places it at the forefront of this tech revolution. Therefore, I maintain a bullish outlook on the stock, even after its 67% year-to-date gain.
Sustained Momentum from Q2 into Q3
TSMC’s Q2 results marked a turning point, delivering its strongest revenue growth in six quarters. The chip manufacturing giant posted $20.8 billion in revenue, up 32.8% year-over-year, with earnings per ADR reaching $1.48, exceeding expectations by $0.06. The driving force behind this was the rapid adoption of TSMC’s cutting-edge 3-nanometer technology, contributing 15% to overall sales during the quarter.
This momentum extended into July and August. In July 2024, TSMC reported revenue of NT$256.95 billion (or $8.04 billion), a 23.6% rise from June and a staggering 44.7% increase from last year. Although August saw a slight decline with NT$250.87 billion (or $7.85 billion) in revenue, this still reflected a 33.0% increase from the same month in 2023. Accordingly, the cumulative sales for January through August of 2024 (i.e., year-to-date) reached NT$1.77 trillion (or $33.7 billion), up 30.8% compared to last year.
But what exactly is driving this growth?
AI Demand and High-Performance Computing Propel Growth
Let’s start with the ongoing surge in AI-related technologies, which has been a significant factor driving TSMC’s Q3 growth. It has most certainly bolstered my bullish view of the stock as well. In fact, the global appetite for AI chips, especially those used in high-performance computing (HPC), has soared.
With TSMC being the key supplier for industry leaders like Nvidia (NVDA) and AMD (AMD), who rely on its cutting-edge 3-nanometer and 5-nanometer technologies to power their AI-driven products, this forms a natural tailwind for the Taiwan-based chip manufacturer.
Nvidia, for instance, which dominates the AI chip market, keeps placing heavy orders for TSMC’s chips to meet the demands of its expanding AI portfolio, which is evident in its own soaring revenues. This trend is set to be maintained, with TSMC projecting a compound annual growth rate of 50% in AI-related chip revenues through 2027. By then, these chips are forecasted to account for over 20% of TSMC’s total sales, marking significant growth for this emerging segment.
Smartphone Market Rebounds with Advanced Chips
Another factor supporting my bullish case on the stock, which has contributed to TSMC’s post-Q2 sales, is that the high-end smartphone market is showing signs of a strong recovery. Recent developments indicate that consumer demand for AI-powered smartphone features, such as enhanced photography, augmented reality, and voice recognition, drives orders for advanced chips.
Smartphone giants such as Apple (AAPL), which unveiled the iPhone 16 built for AI from the ground up, are leaning heavily on TSMC’s advanced technologies to deliver these capabilities.
Expansion in Automotive and IoT Sectors
While AI and smartphones have been the primary forces behind TSMC’s recent momentum, the company also benefits from advancing demand in the automotive and Internet of Things (IoT) markets. As electric vehicles (EVs) and autonomous driving technologies advance, auto manufacturers increasingly rely on semiconductors to manage the complex AI systems within modern cars. Companies like Tesla (TSLA) and General Motors (GM) are expanding their use of TSMC’s state-of-the-art chips to power the electronics required for EVs and self-driving capabilities.
In addition, the growth of IoT devices—ranging from smart home systems to industrial applications—has increased the need for smaller, more efficient chips. This trend has created a new stream of demand for TSMC, helping the company diversify beyond its traditional markets and reinforcing its long-term growth prospects.
Is TSM Stock a Buy or Sell?
Wall Street’s view on TSM stock remains heavily bullish. There’s currently a Strong Buy consensus rating on the stock based on 11 unanimous Buy recommendations assigned in the past three months. At $184.30, the average TSM stock price target implies 10.14% upside potential.
If you’re wondering which analyst to follow concerning TSM stock, the most profitable analyst (on a one-year timeframe) is Gokul Hariharan from J.P. Morgan (JPM), with an average return of 62.89 per rating and a 100% success rate.
Conclusion
To sum up, TSMC’s growth momentum into Q3 continues to be fueled by rising AI demand, especially in high-performance computing and smartphones. With significant players like Nvidia and Apple relying on TSMC’s cutting-edge chips, the company is well-positioned to capitalize on the AI revolution. Moreover, the automotive and IoT sectors are expanding, creating new growth avenues. For these reasons, my outlook on TSMC remains bullish.
