Taiwan Semiconductor Manufacturing Stock Rises on Positive AI Demand Forecasts

On Thursday, the shares of Taiwan Semiconductor Manufacturing (TSM) surged by 3.9%. This increase followed the announcement of the company’s fourth-quarter report for 2024, which highlighted better-than-expected financial results.

The rise in stock price can be attributed to TSMC surpassing Wall Street's expectations for revenue and earnings in the fourth quarter. However, a significant factor behind this increase is the company's optimistic outlook for robust demand, particularly in the artificial intelligence (AI) sector, expected to continue into 2025 and beyond.

In its commitment to meet the anticipated demand, TSMC plans to boost its capital expenditures (capex) between $38 billion and $42 billion in 2025. This represents an impressive annual growth rate of 28% to 41% in capital investment.

TSMC produces semiconductors for various clients, such as Nvidia, Advanced Micro Devices, Broadcom, Marvell Technology, Arm Holdings, and Qualcomm. Additionally, major tech companies like Apple design some of their chips through TSMC. It is widely known that Apple and Nvidia are TSMC's two largest customers according to Wall Street analysts.

Key Financial Highlights of TSMC's Fourth Quarter

Metric	Fiscal Q4 2024	Year-over-Year Change
Revenue	$26.88 billion	37%
Earnings per Share (EPS)	$2.24	56%

These financial figures are sourced in U.S. dollars, with the company’s revenues in its local currency, New Taiwan dollars, indicating an increase of 39% in revenue and a 57% rise in EPS.

Wall Street's expectations had estimated an EPS of $2.20 and revenue of $26.2 billion, but TSMC exceeded those forecasts significantly.

The company's revenue growth for the fourth quarter, categorized by platform, was detailed by CFO Wendell Huang during the earnings call:

• High-performance computing (HPC), including AI chips, grew by 19%, contributing 53% of total revenue.
• Smartphone revenues rose by 17%, making up 35% of total revenue.
• Internet of Things (IoT) revenues dropped by 15%, accounting for 5% of total revenue.
• Automotive chip sales increased by 6%, contributing 4% to total revenue.
• Digital consumer electronics (DCE) revenues fell by 6%, making up 1% of total revenue.

Management's Insights

In the earnings release, Huang noted, "Our business in the fourth quarter was bolstered by strong demand for our advanced 3nm and 5nm technologies. As we enter the first quarter of 2025, we expect the business to be influenced by typical smartphone seasonality, which is usually slow during this time of year, but this will be partially offset by continued growth in AI-related demand."

During the fourth quarter, advanced technology shipments (defined as 7-nanometer and more advanced technologies) made up 74% of total wafer revenue. Additionally, for the entire year of 2024, advanced technologies constituted 69% of total wafer revenue, a significant increase from 58% in 2023.

Moreover, CEO C.C. Wei stated that the company’s 2-nanometer technology (N2) is on track for volume production scheduled for the second half of 2025.

Dividend Growth

Unlike many competitors in the semiconductor sector, Taiwan Semiconductor Manufacturing offers a dividend, which has seen a significant increase of about 67% over the past five years. As of the market close on Thursday, the dividend yield stood at approximately 1.3%.

Future Guidance and Outlook

For the first quarter of 2025, TSMC management anticipates revenue between $25 billion and $25.8 billion, translating to an expected year-over-year growth rate of about 33% to 37%. This estimate exceeds Wall Street's expectations of $24.9 billion.

During the earnings call, Wei shared insights into TSMC's full-year revenue forecast for 2025:

• Revenue is expected to grow by close to the mid-20s percentage range in U.S. dollar terms.

• "After tripling in 2024, we project our revenue from AI accelerators to double in 2025 as the demand related to AI continues its strong increase," Wei remarked, noting that sales from AI accelerators contributed a mid-teens percent of the company's total revenue in 2024.

Wei also discussed the five-year growth outlook:

• The company forecasts revenue growth approaching a 20% compound annual growth rate (CAGR) over the next five years.

• Revenue growth from AI accelerators is projected to hit a mid-40% CAGR, starting from a robust base in 2024.

A Stock to Consider

For investors focused on growth, TSMC could be an attractive consideration. The company leads the market in manufacturing advanced technology chips and is in a favorable position to benefit from the increasing demand for chips crucial for AI functionalities. Furthermore, the increasing dividend provides an added advantage for investors.

Currently, TSMC's shares are priced at roughly 19.8 times projected earnings for 2025, with analysts forecasting a year-over-year earnings growth of around 19.3% and an impressive 31.4% CAGR over the next five years. This valuation appears to be quite reasonable.

However, it's important to note that geopolitical risks exist, particularly regarding Taiwan and its relationship with China. Despite these risks, a military action from China seems unlikely as it would likely provoke an immediate reaction from numerous countries reliant on semiconductor production in Taiwan.

Regarding the recently announced restrictions on advanced chip exports by the Biden administration, Wei mentioned that TSMC has not yet completed a thorough analysis of the impact but for now views it as manageable and not significant at first glance.

Taiwan, Semiconductor, Stock