(Bloomberg) — Taiwan Semiconductor Manufacturing Co. Ltd.’s stock has risen by $420 billion this year, but that valuation will be put to the test next week when it reports earnings, where analysts expect the company to raise its full-year sales forecast.
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The world's largest contract chipmaker will probably report a 29% rise in second-quarter net profit on Thursday, according to the median estimate of analysts surveyed by Bloomberg.More importantly, analysts from JPMorgan Chase to Morgan Stanley expect the company to raise its full-year sales outlook as well, justifying a further expansion in its valuation.
Like Nvidia, TSMC has become an artificial intelligence investment favorite for investors because few competitors can replicate its cutting-edge technology. That gives TSMC the negotiating power to raise prices for its advanced chips as demand soars. Analysts have been busy chasing valuations and price targets, and earlier this week the company's U.S. market capitalization hit $1 trillion.
“Investors have recognized that TSMC is a pick and shovel type of investment in the AI theme,” said Jean-Chi Cortesi, a portfolio manager at Gam Investment Management, whose largest fund has the stock as its largest holding. “My view is that AI demand is likely to persist for at least the next few quarters, as demand for AI chips shows no signs of slowing so far.”
The company, the sole supplier of advanced chips to Nvidia and Apple, had previously forecast full-year sales growth of low- to mid-20% but that forecast is increasingly seen as too cautious after better-than-expected sales in the April-June quarter and rivals including Samsung Electronics Co. and major customer Broadcom Inc. reported profits.
TSMC said on Wednesday that its second-quarter sales rose 40%, beating the average forecast of a 36% increase, helping to buoy investor expectations.
The Taiwan-listed company's shares traded at 13 times projected earnings for 2025 earlier this year. In the space of six months, that value has jumped to 21. Analysts say the value could rise further if TSMC's profit margins prove to be improving.
“Accelerating earnings growth should prompt a reassessment of valuation,” said Kevin Wang, an analyst at Mizuho Securities Asia, who raised his price target on the Taiwan-listed company by 17% this month. “Improving margins could drive earnings growth of 25% or even 30%, which could lead to an expansion in valuation to at least 25 times.”
Investors will be scrutinizing TSMC's earnings call for further clues about the recovery of the chip market and the dynamics of AI demand, which is helping to offset weak smartphone sales that are just beginning to recover from a slump.
Rising demand for premium smartphones and product upgrades in high-performance computing could lead to higher prices for more advanced semiconductors. JPMorgan estimates that TSMC could raise prices of its most advanced chips for various customers by 3% to 6%.
“Mid-single-digit price increases across more than 50% of revenue should boost gross margins by more than 100 basis points in 2025,” JPMorgan analysts including Gokul Hariharan wrote in a July 7 note. The analysts expect TSMC's gross margins to jump to 58% next year, above the consensus estimate.
Still, some appear worried about the company's valuation. Foreign investors were net sellers of the company's shares for five straight trading days through Thursday, according to data from the Taiwan Stock Exchange.
Its market capitalization now far exceeds the combined size of all the Latin American companies in MSCI Inc.'s emerging-markets benchmark, which tracks millions of dollars in global capital, according to Bloomberg calculations.
“Right now there's a shortage of everything across the AI supply chain,” said Robert Chen, a Taipei-based analyst at Bank of America Corp. “Taiwanese semiconductor stocks are not highly valued. They've had a big run-up in stock prices, but they have earnings to back them up.”
–With assistance from Argin Chang and Betty Hou.
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