TSMC Earnings Analysis: Strong Profitability Beats All Expectations!

$Taiwan Semiconductor Manufacturing(TSM)$ just released its Q2 report, with all figures exceeding expectations and boosting investor confidence.

This article gonna analyze the key indices in the earnings of $Taiwan Semiconductor Manufacturing(TSM)$ and explain why its earnings is so strong.

Earnings Data

1. TSMC's revenue for Q2 was $18.158 billion, within company's guidance of $17.6-18.2 billion and up 36.6% year-over-year.

In terms of gross margin, $Taiwan Semiconductor Manufacturing(TSM)$ also beat its own guidance of 56%-58%.

2. In the second quarter, TSMC gross margin is 59.1% and net margin is 44.4%, both reaching record highs.⭐

3. With the improved profitability, $Taiwan Semiconductor Manufacturing(TSM)$ achieved a record net income of $8.06 billion in the second quarter, up 67.9% year-over-year.⭐

Strong Profitability

Profitability improvement is mainly driven by 3 aspects:

• improvement of advanced processes
• depreciation of the New Taiwan dollar
• cost reduction

Among them, 7nm and below advanced processes contributed 51% of revenue in the second quarter, the second highest ratio ever.

The cost decline was mainly due to higher sales volume and advanced process optimization, details of which were not disclosed in the second quarter report.

Prior to earnings release, the market was quite worried about chip demand, especially the year-on-year decline in PC and cell phone sales.

However, in the second quarter, HPC (High Performance Computing) contributed 43% of revenue, surpassing smartphones for the first time. Management expects HPC to be a long-term growth engine in the future.⭐

It was not hard to predict $Taiwan Semiconductor Manufacturing(TSM)$ has a excellent Q2 earnings. But analysts and market are all suprised at its strong profitability.

Remove Market Doubts

1. Demand

Management has made it clear that current demand still exceeds supply capacity and expects capacity utilization to remain good through 2023.

2. Cyclical risk? Not Significant

Despite the good news, management also highlighted inventory risk, arguing that the next few quarters will see inventory adjustments in the industry. 2023 will see a typical down cycle in chip demand, but not the big down cycle of 2008.

Taking 2008 as an example, TSMC's revenue decline will not be significant even in a major global recession.

TSMC's advanced processes already account for more than half of the company's revenue and are far more resilient to risk than they were 10 years ago. As a result, the market exaggerated the impact of the recession on TSMC.

3. Strong Guidance

TSMC expects 3Q revenue reaches $19.8-20.6 billion, with a year-over-year growth rate of between 33.1% and 38.5%, exceeding analysts' expectations of $18.44 billion.

Management again emphasized that

revenue growth in 2022 will be around 30%. This is the fastest revenue growth rate for TSMC in the last 10 years.

In terms of profitability, gross margin for the third quarter is expected to be 57.5% to 59.5%, exceeding market estimates of 56.1%.

Meanwhile, operating income margin is expected to range from 47% to 49% in the third quarter, compared with the market estimate of 46.1%.

At the earnings meeting, management brought us good news: TSMC expects long-term revenue to grow at a compound annual growth rate of 15-20%, which is very impressive given TSMC's current revenue volume of nearly $60 billion per year.⭐

Conclusion

After a sharp drop in share price, TSMC's dynamic P/E ratio has dropped to 15.7x, a new low since 2018.

Will a strong earnings report reverse the tumbling stock price this time? Let's wait and see.

What's your opinions toward TSM's earnings?

Share your thoughts in the comment section!