To The Moon

Taiwan Semiconductor Manufacturing Company ( $Taiwan Semiconductor Manufacturing(TSM)$ ) has been a key player in the global semiconductor industry, commanding widespread attention from investors and analysts alike. The company’s upcoming earnings report on October 17, 2024, has ignited discussions on whether it can beat expectations and make a return to its once-glorious $1 trillion market cap. Several factors, including a sharp increase in recent sales and robust demand for AI-driven chip technologies, fuel the optimism surrounding TSMC’s performance. However, a closer look at these signals and the broader semiconductor industry reveals the potential and challenges that could either propel TSMC forward or keep its market value in check.

Sales Surge: A Precursor to Strong Earnings?

TSMC’s September 2024 sales data stunned the market, posting a year-over-year growth of 39.6% and generating NT$251.87 billion ($7.82 billion) in revenue. This marks an upward trend, driven by surging demand for chips used in artificial intelligence (AI) and other advanced technologies. TSMC's total third-quarter revenue hit NT$759.69 billion ($23.58 billion), surpassing analysts' expectations of NT$749.88 billion.

Given that TSMC exceeded its internal sales guidance for Q3, many are hopeful that these strong results will translate into a stellar earnings report. The consensus earnings per share (EPS) estimate for the third quarter stands at $1.74, with revenue expected to reach $22.72 billion. Importantly, TSMC has a history of outperforming expectations, boasting a trailing four-quarter earnings surprise average of 7.83%. If this trend continues, TSMC could once again beat analysts' estimates. However, it’s worth noting that Zacks' Earnings ESP (Expected Surprise Prediction) model does not strongly indicate an earnings beat this quarter, suggesting that the outcome is still uncertain.

AI Boom: Fueling TSMC’s Long-Term Growth

One of TSMC’s main growth drivers is the rising demand for AI chips, a key segment where the company has heavily invested in research and development. AI-related technologies are expected to grow at an annual rate of 50% through 2028, eventually making up a significant portion of TSMC's revenue. The company's 2-nanometer chip design, which is set to lead the next phase of semiconductor innovation, positions TSMC to capitalize on the AI boom.

As major clients like Apple and Nvidia increasingly rely on TSMC for their chip needs, the company has established itself as a pivotal player in the tech supply chain. In fact, TSMC's dominance in AI chip production could catalyze a broader semiconductor rally, especially as the industry races to meet growing demand. Investors see TSMC as well-poised to benefit from secular trends in AI, electric vehicles, and other high-tech industries that require advanced semiconductor solutions.

Market Valuation: Is TSMC Undervalued?

Despite its growth potential, TSMC’s valuation metrics reveal that it is not overly expensive compared to industry peers. The stock currently trades at a price-to-earnings (P/E) ratio of 33.28x, slightly higher than the industry average of 27.59x, and its price-to-cash-flow ratio is pegged at 21.80x. These numbers suggest that while TSMC’s valuation is not cheap, it’s also not out of line with market expectations for a leading global semiconductor company.

What might concern investors is whether TSMC's recent stock price growth has fully priced in its near-term prospects. The stock has rallied approximately 75% from August lows, driven largely by optimism surrounding AI demand and the company's strong financials. Short-term price targets range from $170 to $250, with an average target of $204.71, suggesting the potential for a 10.2% upside from the current trading price of $185.78. While this indicates room for further gains, it also highlights that much of the optimism may already be reflected in the stock price.

The Path Back to a $1 Trillion Market Cap

To return to its former $1 trillion market cap, TSMC will need to sustain both revenue and profit growth, driven by continuous demand for cutting-edge chips. Analysts expect the company to report strong sales growth over the next two fiscal years, with estimates pointing to revenue increases of 23.6% and 23.5% in 2024 and 2025, respectively. This growth will likely be supported by continued demand for AI, smartphones, and other high-performance computing applications.

However, potential headwinds remain. The semiconductor sector is notoriously cyclical, and any slowdown in global demand for consumer electronics or technological innovations could negatively impact TSMC’s growth trajectory. Additionally, geopolitical risks, particularly related to Taiwan’s sensitive position in global trade, could weigh on investor sentiment.

Conclusion

TSMC’s recent sales surge and its leadership in AI chip manufacturing provide strong tailwinds heading into its Q3 earnings report. While the company has consistently surpassed earnings expectations in the past, this quarter’s results may be less clear-cut due to mixed signals from the market. However, the long-term outlook remains bullish as demand for advanced semiconductors shows no signs of slowing down.

Ultimately, TSMC’s ability to return to a $1 trillion market cap will depend on its ability to maintain its technological edge, drive revenue growth, and manage external risks. Investors will be watching closely on October 17 to see if TSMC can deliver another earnings surprise and solidify its position as the semiconductor sector’s heavyweight champion.

@TigerWire