Taiwan Semiconductor Manufacturing (TSM) posted explosive Q3 results, topping consensus estimates for both revenue and EPS and delivering record profits. The company achieved revenue of $23.50 billion and net income of $10.2 billion, celebrating a 36% and 54.2% year-over-year increase, respectively. Naturally, These exceptional results sent the stock soaring. Although TSM has already experienced a prolonged rally, over 118% over the past year, its stellar performance indicates that the stock still has room for further gains at today’s valuation. Thus, I remain bullish on TSMC.
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Dazzling Sales Growth
As I just mentioned, TSM achieved revenues of $23.5 billion in Q3, marking a new quarterly record and a 36% year-over-year growth. The stellar result was mainly driven by the rapid adoption of TSM’s industry-leading 3-nanometer and 5-nanometer process technologies. These two accounted for 52% of total revenue, with 3nm alone making up 20% of total sales. This is a significant increase from last year when 3nm was still ramping up and contributed minimally to revenue, showing just how fast TSM’s latest tech is being adopted by the market.
According to TSM’s management, this tremendous demand was backed by a surge in smartphone sales and AI-related products. Specifically, High-Performance Computing (HPC) remained the most significant contributor to revenue, accounting for 51% of sales, while Smartphone revenues grew by 16% sequentially to account for 34%. The Internet of Things (IoT) and Automotive segments also posted sequential solid growth of 35% and 6%, respectively. With multiple tailwinds from the current semiconductor market and TSM being virtually the only player capable of bringing these chips to life, the company is firing on all cylinders, which is evident by recent results.
Exceptional Margins Despite Rising Costs
TSM’s exceptional pricing power in the semiconductor industry and economies of scale emerging from its ever-rising revenues have allowed it to maintain superior margins despite increasing costs. Notably, TSM posted a gross margin of 57.8% in Q3, marking a significant expansion from 53.2% in Q2 and 54.3% last year. This was driven by higher capacity utilization and ongoing cost-control efforts.
TSM’s operating margin also expanded to 47.5%, up from 42.5% in Q2 and 25.9% last year, reflecting how easily the company can scale as production increases. Thus, TSM’s net profit margin reached 42.8%, while EPS hit a record $0.39. This, in turn, marked a 31.2% increase from Q2 and a 54.1% increase from last year.
A Reasonable Price for Tremendous Growth
Despite its explosive post-earnings rally, I believe that TSM’s valuation remains reasonable, given its rapid earnings growth. Following record profits in Q3, consensus EPS estimates for the year now stand at $7.03, representing a 35.8% year-over-year growth. This figure suggests the stock trades at a P/E ratio of around 28.6. Wall Street expects TSM to achieve further EPS growth of 24% next year and, thus, a forward P/E of 23.0. I believe these multiples are not excessive, given such tremendous earnings expansion and TSM’s commanding position within the global semiconductor supply chain.
In addition, while these estimates may sound aggressive, I wouldn’t be surprised if TSM managed to beat them relatively comfortably. Note that TSM’s management has historically been quite conservative, yet in the post-earnings call, it admitted that one of its key customers told them that they are experiencing “insane” demand from AI innovators and hyperscalers. Therefore, TSM management expects revenue from server AI processors to increase this year.
Moreover, this surge in AI-related products comes alongside strong smartphone sales, which will continue to drive revenue growth. consequently, TSM’s ongoing momentum is projected into Q4, with sales expected to increase an additional 13% sequentially to a new record. For this reason, I don’t think Wall Street’s estimates are overly optimistic.
Is TSM Stock a Buy, According to Analysts?
Despite the stock’s strong post-earnings rally, Taiwan Semiconductor has featured a Strong Buy consensus rating based on five unanimous Buy ratings in the past three months. At $205.00, the average TSM stock forecast implies a 2% upside potential.
If you have yet to decide which analyst you should trust to trade TSM stock, the most accurate and profitable analyst covering the stock (on a one-year timeframe) is Brad Lin of JPMorgan (JPM). He features an average return of 52.27% per rating and a 100% success rate. Click on the image below to learn more.
Takeaway
TSM’s outstanding Q3 results, driven by strong demand for its cutting-edge 3nm and 5nm technologies, again demonstrated its unmatched position in the semiconductor industry. With explosive revenue growth, expanding margins, and a solid near-to-medium-term outlook, I believe TSM is poised for further gains despite its recent rally. The stock remains attractively valued, given its earnings growth and overall tailwinds in today’s market. Consequently, I view TSM as a compelling investment with additional upside potential.
