3 Compelling Reasons to Consider TSMC Stock Beyond Strong Earnings

Taiwan Semiconductor Manufacturing Company Limited (TSM), also known as TSMC, has recently enjoyed a surge in its stock price following impressive quarterly profits driven by high demand for artificial intelligence (AI) technologies.

However, there are additional factors that make TSMC’s stock an appealing purchase at this time. Here are three reasons why TSMC is not just a trend follower but a strong investment choice.

Strong Q3 Performance and Positive Future Outlook

In the third quarter, TSMC reported a staggering net profit increase of 54.2% year-over-year, totaling 325.3 billion New Taiwan dollars (approximately $10.1 billion), which exceeded many analysts’ expectations. The company’s net revenues for the July to September quarter reached $23.5 billion, marking a 36% increase compared to the same period last year.

The company’s revenue growth was largely thanks to the sales of its advanced semiconductors, particularly those that are 7nm technology or smaller. Notably, TSMC’s recently developed 3nm chips contributed 20% to its Q3 revenues, while 5nm and 7nm chips added 32% and 17%, respectively.

These leading-edge 3nm chips are utilized in devices such as the Apple Inc. iPhone and various high-performance computers. TSMC’s Chief Financial Officer, Wendell Huang, has indicated that revenues are expected to grow further in the fourth quarter due to the rising demand for these advanced chips. Forecasts for fourth-quarter revenues are between $26.1 billion and $26.9 billion, reflecting a 35% annual increase and 13% sequential growth.

Gross margins for the third quarter were recorded at 57.8%, an increase from 54.3% a year earlier. Looking ahead, TSMC expects its fourth-quarter gross margins to remain between 57% and 59% due to the ongoing demand for chips fueled by a rise in AI applications.

Given this favorable quarterly performance and outlook, TSMC’s shares have responded positively, reflecting an impressive year-to-date gain of 90.8%.

Three Additional Reasons to Consider TSMC Stock

Here are three more reasons that suggest TSMC shares have room for further growth:

1. **Strong Competitive Advantage**: TSMC holds a significant competitive edge with over 50% market share among contract manufacturers. This strong positioning has helped TSMC establish stronger relationships with customers and create barriers to entry for competitors.

2. **Efficient Cost Management**: The company has demonstrated its ability to maintain high profitability with an operating margin of 47.5% in the third quarter. This indicates that TSMC successfully retains nearly half of its revenues as profits before taxes, showcasing its proficiency in managing costs. Furthermore, its net profit margin of 39.6% surpasses the industry average of 39.1%, indicating strong financial health.

3. **Rising AI Demand as a Long-Term Trend**: The demand for AI technology is not just a temporary spike; it is projected to grow continuously for several years. TSMC’s plans to set up three manufacturing plants in Arizona, along with other facilities in Europe and Japan, aim to meet this burgeoning demand for advanced chip technology.

Conclusion: TSMC Stock Presents a Solid Investment Opportunity

With TSMC poised for continued growth in the future, investing in this leading manufacturer of advanced semiconductor chips appears to be a wise decision. Analysts suggest that TSMC’s average short-term price target is $216.14, indicating a potential upside of 7% from its last closing price of $201.95. Additionally, the highest price target predicts an upside of 23.8%, reaching $250.

The consensus estimate for TSMC’s earnings per share stands at $6.63, reflecting a 14.3% annual increase—an indicator of positive future growth. Consequently, TSMC currently holds a Zacks Rank of #2 (Buy), suggesting that it is a favorable option for investors looking to capitalize on its promising prospects.

TSMC, Stocks, Investment