To The Moon

On January 15, $Taiwan Semiconductor Manufacturing(TSM)$ released its Q4 earnings report, delivering a major upside surprise. Shares surged more than 7% intraday, hitting a new all-time high, with market capitalization approaching the $2 trillion milestone.

With TSMC's boost, semiconductor stocks surged collectively. $ASML Holding NV(ASML)$ has climbed over 7.5% in the past two trading days, hitting a record high share price and surpassing a $500 billion market cap—making it the third European company to reach this milestone! Meanwhile, $Micron Technology(MU)$ rose over 8.8% to set another all-time high, with a year-to-date gain of 27%!

As a result, semiconductor ETFs have posted solid gains this year: the largest fund $VanEck Semiconductor ETF(SMH)$ has risen over 11%, $iShares Semiconductor ETF(SOXX)$ has gained more than 13%, $INVESCO SEMICONDUCTORS ETF(PSI)$ has climbed over 17%, and $ASML Holding NV ADRhedged(ASMH)$ has surged over 28%.

After a strong start for semiconductors, is it still worth getting on board? Let’s take a look at TSMC’s earnings to glimpse the future of the semiconductor sector!

First, compared with analysts’ expectations, Taiwan Semiconductor Manufacturing Company’s Q4 results came in across-the-board above expectations:

Second, in terms of revenue, TSMC's fourth-quarter revenue reached $33.7 billion, marking a 25.5% year-over-year increase! Since the company disclosed its December revenue figures on January 10, the fourth-quarter revenue is now fully disclosed:

On profitability, TSMC’s Q4 gross margin reached 62.3%, setting a new historical record and coming in well above the consensus estimate of 60.6%. This was mainly driven by higher capacity utilization, depreciation of the New Taiwan dollar, and effective cost control.

By platform, high-performance computing (including GPUs) contributed 55% of revenue, smartphones contributed 32%, while IoT and autonomous driving generated lower revenue. Within this breakdown, high-performance computing grew 4% quarter-over-quarter, while smartphones grew 11% quarter-over-quarter.

On production process side, in the fourth quarter of last year, 3nm contributed 28% of revenue, 5nm accounted for 35%, and advanced processes at 7nm and below generated 77% of total revenue—a record share.

Last year, the 2nm process began mass production and will contribute significant revenue this year, as TSMC continues to widen its technological lead over competitors!

On the earnings call, TSMC guided Q1 revenue to a range of $34.6–35.8 billion. Given management’s typically conservative guidance and the fact that actual revenue has exceeded the upper end of guidance over the past three quarters, using the $35.8 billion upper bound implies Q1 revenue growth of more than 40%, well above analysts’ expectations of $33.2 billion. Gross margin for Q1 is expected to be in the range of 63–65%, also far above the consensus estimate of 59.6%.

TSMC anticipates full-year revenue growth of approximately 30% for 2026, surpassing analysts' forecast of 25%. The company expects a compound annual growth rate (CAGR) of 25% over the five-year period starting in 2024!

TSMC expects its capital expenditures this year to range between $52 billion and $56 billion, significantly exceeding analysts' projections of $50 billion and representing a substantial increase of approximately 32% compared to the $40.9 billion spent in 2025!

TSMC's substantial capital expenditure hike signals robust AI demand. Building a semiconductor fab requires massive investment and takes 2-3 years to reach production capacity. Therefore, without sustainable AI demand, even a giant like TSMC would not dare to commit such massive funds to expand capacity!

This earnings report reignites market confidence in AI, particularly as TSMC's substantial capital expenditure boost signals potential explosive demand for semiconductor equipment. Analysts have already raised ASML's target price to $2,000, representing a 47% increase from current levels!

From this perspective, the fundamentals of semiconductor companies this year are undeniable, and investors need not worry that the AI-driven boom is about to end.

In terms of valuation, TSMC's price-to-book ratio stands at 8.4 times, below the 9.5 times seen at the peak of the semiconductor bull market in 2021:

Compared to five years ago, TSMC's technological capabilities have advanced from 5nm to 2nm, while the semiconductor industry has shifted from being driven by PCs and smartphones to AI.

Unlike traditional electronics, AI—currently in its explosive growth phase—shows no clear cyclical patterns. Semiconductor companies like TSMC are poised to enter a super economic cycle, with valuation ceilings potentially rising!

Beyond TSMC, other semiconductor firms' valuations remain reasonable. For instance, price-to-sales ratio of $NVIDIA(NVDA)$ sits at just 24x, near recent lows:

ASML's price-to-earnings ratio stands at 48x. Given the potential for explosive growth in future earnings, this valuation does not appear expensive.

From this perspective, semiconductors still have room to move higher, and related ETFs remain worth watching:

$VanEck Semiconductor ETF(SMH)$ : The largest semiconductor ETF, with its top holding Nvidia accounting for 18.9% of net assets. It also holds 10.6% of TSMC and significant positions in semiconductor equipment stocks like ASML, Lam Research (Lam Research Corp.), KLA Corp., and Applied Materials. Its management fee is relatively low at just 0.35%.

$iShares Semiconductor ETF(SOXX)$ : In terms of scale, Soxx ranks second only to SMH, with a management fee rate that is also comparable. However, looking at its holdings structure, Soxx holds only 3.8% of TSMC. On the positive side, SOXX’s holdings are more evenly distributed. Its largest position is Micron Technology, accounting for 7.8% of net asset value, unlike SMH, where NVIDIA alone makes up close to 19% of the portfolio.

$SPDR S&P Semiconductor ETF(XSD)$ : With a modest size of only $1.8 billion, its top holdings include too many small-cap stocks, while large-cap stocks like NVIDIA, TSMC, and ASML hold a relatively low proportion. Its year-to-date return stands at just 10.5%, significantly underperforming indices like the SMH and SOXX:

$First Trust Nasdaq Semiconductor ETF(FTXL)$ : Heavily invested in Micron and Intel, with the two together accounting for 26% of net asset value. Its expense ratio is 0.60%, which is relatively higher compared with peers.