Taiwan Semiconductor Earnings: Outstanding Guidance Fueled by AI Conviction | Morningstar

TSMC’s stock remains undervalued after its impressive results.

Despite impressive guidance and results, we maintain our fair value estimate for Taiwan Semiconductor Manufacturing TSM at $213 per share, as the firm’s long-term fundamentals are largely unchanged. TSMC’s stock remains attractive, as the company is the go-to foundry for artificial intelligence chips, being the only one with sufficient scale to meet the content growth demand for cutting-edge chips in both AI and other applications.

TSMC anticipates fourth-quarter revenue to grow 11.6% sequentially to TWD 848 billion at the midpoint (12.8% in USD terms to $26.5 billion), bringing 2024 revenue to TWD 2.87 trillion, above our prior full-year estimate of TWD 2.70 trillion, due to the better-than-expected ramp-up of 3nm mobile and AI products. Gross and operating margin guidance is marginally higher sequentially, to 58% and 47.5% at their respective midpoints, well above our 55% gross margin forecast. As a result, we have increased our 2024 revenue and earnings per share projections by 6% and 10%, respectively.

Third-quarter results were much better than we anticipated. Revenue came in at TWD 760 billion, 13% higher sequentially. Gross and operating margins improved almost 5 percentage points from the prior quarter to 57.8% and 47.5%, respectively. The stellar numbers come from higher utilization, which we believe is concentrated in 5nm and 7nm processes as AI features drive additional chip content on PCs and smartphones. Debottlenecking efforts also helped during the quarter, enabling more AI chip shipments than projected.

Management said 2025 capital expenditure is likely to be higher than 2024 without providing numbers, in line with our view of a 20% year-on-year increase. Back-end packaging capacity remains tight, echoing the Nvidia NVDA CEO’s view of “insane” demand.

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