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Semiconductor stocks have been on an absolute tear in the past decade, driven by the emergence of megatrends like cloud computing and artificial intelligence (AI). One critical semiconductor stock is Taiwan Semiconductor Manufacturing (TSM), which has returned 822% to shareholders since July 2014. After adjusting for dividends, cumulative returns are much higher, at 971.8%.
Valued at a market cap of $956 billion, Taiwan Semiconductor is one of the largest companies in the world. The semiconductor giant isn't expected to report its full Q2 earnings until July 18, but the shares are higher today on strong revenue data for June and the second quarter. So, let’s see if TSM stock looks like a good buy before its upcoming earnings release.
What Do Analysts Expect From Taiwan Semiconductor in Q2?
Taiwan Semiconductor, also known as TSMC, manufactures and sells integrated circuits and wafer semiconductor devices. These chips are used in personal computers, communication system products, automotive, and industrial equipment - including consumer electronics, such as digital video compact disc players, gaming consoles, and cameras.
Analysts tracking TSM stock expect the company to grow earnings by 17.5% to $1.34 per share, while revenue is forecast at $20 billion, up 27.9% year over year. Today's data showed TSM's Q2 revenue up 32% to $20.67 billion. In the year-ago period, it reported revenue of $15.68 billion and earnings of $1.14 per share.
In addition to its Q2 results, investors will also closely watch the company’s forecast for 2024. Wall Street expects the company to end 2024 with revenue of $84.96 billion and earnings of $6.13 per share.
TSM Slips After Strong Q1
Taiwan Semiconductor beat revenue and earnings estimates in Q1, due to strong demand for chips used in AI applications. In fact, TSMC is the largest manufacturer of advanced processors, and its clients include Big Tech giants such as Nvidia (NVDA) and Apple (AAPL).
TSMC explained that it expects Q2 sales to be driven by strong demand for 3-nanometer and 5-nanometer technology, offset by seasonality in the smartphone segment. Despite the Q1 earnings beat, TSM shares traded lower on the day, as traders eyed the warning over continued smartphone weakness.
Due to its tech leadership and widening customer base, TSMC expects to grow sales at a healthy pace in 2024. Several AI innovators are working with the chip maker to address a rapidly expanding market as the demand for energy-efficient computing power continues to rise.
As a result, management expects revenue from server AI processors to more than double in 2024. Longer term, TSMC is also planning to begin producing 2-nanometer chips in 2025, which will be more powerful and efficient than the current chip line-up.
TSMC Is a Manufacturing Giant
Taiwan Semi is positioned for strong performance based on industry tailwinds. The demand for advanced chips used in AI applications, such as ChatGPT and Bard, will drive revenue in the upcoming decade. Another factor driving growth is the company’s focus on advanced chip development, which allows it to maintain market share and benefit from competitive moats.
In Q4 of 2023, a Counterpoint Research report stated that TSMC accounted for 61% of global foundry sales. Its leading market share allows the manufacturing heavyweight to report a net margin of almost 40%, much higher than the industry average of 14%. Analysts attribute its high profit margins to an increased share of sales of highly profitable smaller chips.
What's the Target Price for TSMC Stock?
Out of the 10 analysts covering Taiwan Semiconductor stock, eight recommend “strong buy,” one recommends “moderate buy,” and one recommends “hold,” for a “strong buy” consensus. The average target price for the tech stock is $180.86, which is lower than the current trading price.
Taiwan Semiconductor stock is priced at 29x forward earnings. Looking ahead, its adjusted earnings should improve to $13.80 in fiscal 2028. So, if the tech stock is priced at 25x forward earnings, it should trade around $345 in July 2028, up from the current trading price of $184.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
