Buy Taiwan Semiconductor-Heavy ETFs on Upbeat Earnings

Taiwan Semiconductor Manufacturing Company TSM reported a 54% hike in net profit on Thursday, as global chipmakers continue to benefit from demand boosted by AI applications. The company’s net income was 352.3 billion Taiwanese dollars ($10.1 billion) over the July-September quarter, surpassing an LSEG estimate of $300.2 billion Taiwanese dollars cited by Reuters, as quoted on CNBC. The stock gained 9.8% on Oct. 17, 2024.

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The firm’s third-quarter revenues totaled T$759.69 billion, up 39% from last year. Third-quarter revenues rose 36% year on year to $23.5 billion, better than the company's previous forecast of $22.4 billion to $23.2 billion (read: Taiwan Semiconductor's Pre-Q3 Earnings: ETFs in Focus).

The world’s largest advanced chip maker, TSMC, serves clients such as Apple AAPL and NVIDIA NVDA. Earnings were boosted mainly by higher demand for TSMC’s advanced 3-nanometer chips, which constituted about 20% of overall revenues from wafer sales. Capital expenditure edged higher to $6.4 billion in the third quarter versus $6.36 billion across the three preceding months.

CFO Wendell Huang said fourth-quarter revenues will be between $26.1 billion and $26.9 billion (up from $19.62 billion in the same period of 2023), with a gross margin of 57% and 59%. Annual revenues of TSMC are also expected to grow around 30% compared to the previous guidance of slightly higher than the mid-20% range.

At its quarterly earnings call on Thursday, TSMC said it expects this year’s capital expenditures to be slightly higher than $30 billion, compared with the previous forecast of $30-$32 billion. TSMC estimated its capital spending for the current quarter to more than double to around $11.5 billion due to healthy demand for its products.

"We continue to observe extremely robust AI-related demand from our customers," CEO C.C. Wei said in a post-earnings webcast. However, revenues from TSMC’s Digital Consumer Electronics sector — which makes chips for devices such as smart TVs and cameras — dropped 19% sequentially.

TSMC’s Thursday's earnings came just days after semiconductor equipment maker ASML ASML posted a weak sales outlook for 2025, indicating slow chip demand from sectors outside AI. TSMC’s earnings also provided the same cues.

The AI boom has boosted TSMC shares, with its Taipei-listed stock leaping 75% so far this year, compared with a 29% gain for the broader Taiwan market. This has taken the company’s market capitalization to around $840 billion.

Taiwan Semiconductor stock has a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

The TSMC stock comes from a top-ranked Zacks Semiconductor - Circuit Foundry Industry (top 1%) and top-ranked Zacks Computer and Technology sector (top 6%).

Despite TSMC's strong outlook, the stock doesn't possess a high valuation. On a trailing price-to-earnings (P/E) ratio basis, Taiwan Semiconductor currently trades at a P/E (trailing 12 months) of 33.48X versus 28.09X possessed by the underlying industry.

The price/book (most recent quarter) ratio of the TSMC stock is 8.22X, versus 8.38X recorded by the industry. The price/cash flow (most recent fiscal year) ratio of TSMC is 21.93X versus 22.36X recorded by the industry.

Apart from the TSMC stock itself, investors can play the stock in the ETF form. The TSMC-heavy ETFs include SP Funds S&P World (ex-US) ETF SPWO (TSMC’s weight 15.75%), SP Funds S&P Global Technology ETF SPTE (TSMC’s weight 15.50%), Matthews Emerging Markets ex China Active ETF (MEMX) (TSMC’s weight 14.41%) and VanEck Semiconductor ETF SMH (TSMC’s weight 12.65%).

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ASML Holding N.V. (ASML) : Free Stock Analysis Report

Taiwan Semiconductor Manufacturing Company Ltd. (TSM) : Free Stock Analysis Report

VanEck Semiconductor ETF (SMH): ETF Research Reports

SP Funds S&P Global Technology ETF (SPTE): ETF Research Reports

SP Funds S&P World (ex-US) ETF (SPWO): ETF Research Reports

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