TSMC Earnings Rise on Smartphone and AI Demand, Reviving the Tech Rally on Wall Street

The logo of Taiwan Semiconductor Manufacturing Co. (TSMC) at its headquarters in Hsinchu, Taiwan, on Jan. 19, 2021. Ann Wang/Reuters

Taiwan Semiconductor Manufacturing Company (TSMC) reported strong third-quarter earnings and revenues overnight, reviving the rally in Wall Street technology shares.

The Hsinchu, Taiwan-based company delivered a net income of $1.94 per share on $23.5 billion in revenues, surpassing analysts’ estimates of $1.74 per share and $22.72 billion, respectively.

Revenues rose by 36 percent for the year and 12.9 percent for the third quarter, thanks to solid demand for semiconductor products used in smartphones and AI applications. Shipments of 3-nanometer (nm) process technology accounted for 20 percent of total third-quarter wafer revenue; 5 nm accounted for 32 percent; 7 nm accounted for 17 percent; and 7 nm accounted for 69 percent of total wafer revenue.

Strong revenue growth helped the company maintain high profit margins, with a gross margin of 57.8 percent, an operating margin of 47.5 percent, and a net profit margin of 42.8 percent for the quarter.

Wendell Huang, senior vice president and chief financial officer of TSMC, heralded the company’s solid performance.

“Our business in the third quarter was supported by strong smartphone and AI-related demand for our industry-leading 3nm and 5nm technologies,” he said in a statement accompanying the release of the third-quarter financial results. “Moving into fourth quarter 2024, we expect our business to continue to be supported by strong demand for our leading-edge process technologies.”

For the fourth quarter of 2024, management expects revenue of $26.1 billion to 26.9 billion, a gross profit margin of 57–59 percent, and an operating profit margin of 46.5–48.5 percent.

TSMC’s solid earnings and positive guidance contrast sharply with the earnings report of semiconductor equipment maker ASML a couple of days ago, and helped reignite another tech rally on Wall Street.

At 10 a.m. EST on Oct. 17, TSMC shares were trading at $209 per share, up by 11 percent from the previous closing; Broadcom was up by 4 percent, ARM by 3.2 percent, Nvidia by 3.5 percent, and the iShares Semiconductor ETF by 2 percent.

While it’s hard to predict whether these gains in semiconductor shares will withstand another disappointing report from another tech company, TSMC has several advantages. First, it is a pure foundry play, with a dominant market share of 61.2 percent as of the fourth quarter of 2023 and technological leadership in advanced process nodes, such as 3 nm, creating a strong entry barrier for would-be competitors.

Second, the company has forged strong partnerships and alliances with tech giants such as Apple, Qualcomm, and Nvidia, leaders of the still-emerging 5G, AI, and IoT segments of the IT sector. In 2023, TSMC’s annual capacity of the manufacturing facilities managed exceeded 16 million 12-inch equivalent wafers.

Third, the company utilizes its assets efficiently, as evidenced by the decreasing inventory turnover and stable asset turnover.

Fourth, TSMC is in a virtuous growth cycle led by a strong entrepreneurial focus on innovation, fueled by its consistent investment in R&D and the development of cutting-edge technologies such as 3D IC and next-generation lithography.

Fifth, a diversified manufacturing presence across multiple countries, with critical investments in new fabs in the United States (Arizona and Phoenix) and Japan (Kumamoto), brings the company closer to its large customers. At the same time, these locations ease geopolitical risks associated with the ongoing tech war between China and the United States.

These advantages have helped TSMC deliver superior returns to its capital holders, as measured by unit economic value added (EVA), which has remained around 20 percent over the past five years. Unit EVA is the difference between the return on invested capital—what companies earn by investing capital in different projects—and the weighted average cost of capital that finances these investments.

Despite the superior gains propelling its shares in recent years, TSMC remains reasonably valued. It’s trading with a forward price-to-earnings ratio of 23 and a price/earnings-to-growth ratio of 1.29. The company’s low debt-to-equity ratio of 0.26 times and a current ratio of 2.47 times as of fiscal year 2024 provide a cushion against a considerable industry slowdown.

Reasonable valuations must have contributed to today’s rally in the company shares and the shares of other technology companies, which pushed Wall Street’s equity indexes higher in early Thursday morning trade.

Still, a strong U.S. retail report tamed gains in the broader market, pushing bond yields higher.

“Retail sales surprised to the upside despite an expected pullback in gasoline station sales (due to falling gas prices),” Sonu Varghese, global macro strategist at Carson Group, told The Epoch Times via email. “Core retail sales were even better, surging 0.7 percent, with gains across most categories, including ongoing strength in online sales, confirming that goods consumption is strong.”

Strong retail sales indicate that U.S. economic growth remains robust, diminishing the chance of another sizable interest rate cut by the Federal Reserve in December. As a result, the benchmark 10-year U.S. Treasury bond yields rose, touching the 4.1 percent mark, driving interest rate-sensitive stocks lower.

Nonetheless, David Russell, global head of market strategy at TradeStation, sees a strong U.S. economy bringing the traditional Santa Clause rally early to Wall Street this year.

“The economy continues to accelerate thanks to the U.S. consumer, and may improve further as lower fuel prices kick in,” he said in an email to The Epoch Times.“Today’s numbers make a recession look even less likely. Santa could be coming to town this year. He might already be here.”

Disclosure: The author owns shares of Taiwan Semiconductors.