Taiwan Semiconductor Manufacturing Company (TSM) is the world’s largest dedicated contract chip manufacturer, with over a 60% market share.

It recently reported outstanding results that pushed its stock to a record high. TSM stock has been one of the biggest beneficiaries of the global race to develop artificial intelligence (AI). Its shares have more than doubled since that boom took off in late 2022 with the debut of OpenAI’s ChatGPT.

The company reported a 54% year-on-year jump in net profit to $10.1 billion for the third quarter, exceeding its forecast from just three months ago. Management also raised its growth outlook on the back of the AI boom and a broad-based recovery in other sectors, defying market jitters over the current semiconductor industry upcycle’s longevity.

“We continue to observe extremely robust AI-related demand,” CC Wei, chair and CEO, told investors, adding that Taiwan Semiconductor expected revenue to grow nearly 30% this year. This estimate is up from the previous projection in the mid-20% range. It expects revenue of $26.1 billion to $26.9 billion in the final quarter, raising the prior estimate for $24.9 billion.

This robust outlook was in stark contrast to what was said by ASML Holding NV (ASML), the Dutch company that supplies the lithography machines used to make the world’s most advanced chips. It reported orders that were half of Wall Street expectations, with the shortfall due to weakness at Samsung and Intel (INTC).

TSM Is Different

Taiwan Semiconductor, also known as TSMC, dominates production of cutting-edge semiconductors, and appears to be isolated from the weakness in other parts of the semiconductor industry. Wei said he expects revenue from AI server processors to more than triple this year, leading to a mid-teens percentage of total sales in 2024.

The results were broad-based. It produces chips for more than 500 companies, including the latest AI processors for Nvidia (NVDA) and iPhone chips for Apple (AAPL). This business model gives TSM unrivaled scale and balance.

The company said its strong third-quarter performance — with revenue, gross margins and operating margins all exceeding earlier guidance — was supported by a recovery in demand across all segments - from smartphones to industrial applications and car chips.

Longer-term, TSMC is pursuing a rapid international expansion to give it geographic balance. The company is planning more factories in Europe with a focus on the market for AI chips, and that’s on top of construction underway in Japan, Germany, and Arizona. 

Let’s take a quick look at its U.S. factory in Arizona.

Huge Progress in Arizona

Taiwan Semi achieved early production yields at its first plant in Arizona that surpassed similar factories back home. This is significant, since this U.S. expansion project was initially dogged by delays and worker strife.

The share of chips manufactured at its facility in Phoenix that are usable is about 4 percentage points higher than comparable facilities in Taiwan. The success rate, or yield, is a critical measure in the semiconductor industry, because it determines whether companies will be able to cover the enormous costs of a chip plant.

This first of three planned factories entered engineering wafer production in April with 4-nanometer process technology. The latest yield advancement is especially notable, because the company has historically kept the most advanced and efficient plants in Taiwan only.

Wei conveyed optimism about the U.S. push during the recent earnings call. He said, “We now expect volume production of our first fab to start in the beginning of 2025, and are confident to deliver the same level of manufacturing quality and reliability from our fab in Arizona as from our fabs in Taiwan.”

Buy TSM Stock

Bloomberg Intelligence analyst, Charles Shum, said: “TSMC’s 57%-plus gross-margin guidance for 4Q (vs. consensus’ 54.7%) — coupled with the fast ramp-up of N3-node revenue — indicates still-strong demand for its AI chips from Nvidia and others, consistent with our view. Sales growth of about 25% in 2025 looks feasible, based on our calculations, supported by TSMC’s leadership in 3- and 5-nm (nanometer) nodes (process technologies), and its advanced CoWoS proprietary semiconductor packaging technology.”

I’m largely in agreement.

Taiwan Semiconductor’s long-term earnings growth outlook is resilient, given its more than 90% share in the leading-edge foundry processes (3- and 5-nanometer nodes), its expanding gross margin outlook, and its leadership in AI chips, coupled with future investments supported by strong cash flow generation and net cash position (10% of assets as at end 2023).

High-performance computing will remain the company's largest growth driver. The increasing in-house design of cloud computing and AI chips by U.S. and Chinese internet giants will benefit Taiwan Semiconductor for the next several years.

Global tech groups all want their own homegrown chip. They may have the resources to design their own, but they must outsource manufacturing. That means the business of chip foundries — making the physical chips for other companies on a contract basis — now offers huge growth opportunities.

With its stable business outside AI, Taiwan Semiconductor is much better positioned than its rivals, allowing it to weather any downturns.

Buy TSM stock anywhere below $202.

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