Taiwan Semiconductor Manufacturing Stock (TSM -1.53%)or TSMC, rose after the semiconductor contract manufacturing company posted strong earnings growth again and announced a positive outlook as it continues to benefit from artificial intelligence (AI).
Let’s take a closer look at TSMC’s earnings and guidance to determine if now is a good time to buy the stock.
AI winner
TSMC’s revenue growth accelerated in the fourth quarter, with revenue increasing 37% to $26.9 billion compared to 36% growth in the previous quarter. Meanwhile, earnings per American Depositary Receipt (ADR) was $2.24, an increase of 56% from $1.44 in the year-ago period. Both numbers were solidly above analysts’ consensus expectations.
AI chips once again drove TSMC’s results, with high-performance computing (HPC) accounting for 53% of revenue in the quarter. HPC revenue increased 19% sequentially. A year ago, this segment accounted for 43% of revenue.
Smartphone chip sales increased 17% sequentially and accounted for 35% of overall revenue. A year ago, smartphone sales accounted for 43% of total sales.
The company continues to grow its advanced technologies, with sub-7 nanometer (nm) nodes accounting for 74% of revenue, up from 69% in the third quarter and 67% in the year-ago period. 3-nanometer technology accounted for 26% of total wafer revenue, up from 20% in the previous quarter and 15% in the year-ago period.
TSMC once again continued its impressive gross margin expansion, benefiting from pricing power and high capacity utilization. This is despite TSMC still seeing margin compression due to scaling up of new 3nm technology. New technologies initially have low margins until they reach scale. Overall, the company’s gross margin increased 600 basis points year over year and 120 basis points sequentially to 59%. The higher your gross profit margin, the lower your bottom line will be. Therefore, improving gross margins can help revenue grow faster than revenue.
The company expects first-quarter sales of $25 billion to $25.8 billion. This represents approximately 35% year-over-year growth at the midpoint of the guidance range. Gross profit margin is expected to be 57% to 59%, and operating profit margin is expected to be 46.5% to 48.5%. We expect profit margins to be compressed by 2% to 3% due to the expansion of some new overseas foundries.
TSMC aims for full-year sales growth in 2025 at a level close to the mid-20% level. He added that AI accelerator revenue tripled in 2024 and is expected to double in 2025.
The company, which spent nearly $30 billion in capital expenditures last year to expand production capacity, plans to spend between $38 billion and $42 billion in capital expenditures this year. The company said its first fab in Arizona was already in high production in the fourth quarter, and a new Japanese foundry also began production at the end of the fourth quarter. There are currently plans to build two more facilities in Arizona and one in Germany.
Image source: Getty Images.
Is TSMC stock worth buying?
TSMC continues to deliver strong revenue and profitability growth. AI chips are helping lead the way, and the company continues to work on adding capabilities to meet the growing demand for AI chips. At the same time, the company’s strength in 3nm and 5nm technologies makes it the clear leader in high-performance computing, even as competitors struggle. This provides strong pricing power and improved gross margins.
The company’s stock currently trades at a forward price-to-earnings ratio of 24 times based on analysts’ 2025 estimates and 20.5 times based on 2026 estimates. Meanwhile, the company’s forward price-to-earnings ratio (PEG) is less than 0.7. A PEG of less than 1 is generally considered undervalued, but growth stocks often have a PEG higher than that level.
TSMC remains in an enviable position as AI infrastructure and data center growth is expected to continue and capacity is tight. The company is a go-to maker of advanced chips, and with Intel and Samsung’s struggles, it doesn’t seem like that’s going to change anytime soon.
So despite the recent post-earnings rally, TSMC stock looks like a solid buying choice given its attractive valuation and the opportunity still in front of it from building out its AI infrastructure. Most of all, it will benefit whether customers continue to prefer chips like Nvidia’s graphics processing units (GPUs) or look more toward custom AI chips like Broadcom. Either way, it wins.
Jeffrey Seiler has no position in any stocks mentioned. The Motley Fool has positions in and recommends Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends the following options: February 2025 $27 short calls on Intel. The Motley Fool has a disclosure policy.
