(Bloomberg) — The Taiwanese semiconductor manufacturing company's $420 billion equity rally this year will get a valuation test next week when it reports earnings, with analysts expecting the chipmaker to beat its full-year sales forecast. will increase.
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The world's largest contract chipmaker will report a 29 percent rise in second-quarter net income on Thursday, according to the median estimate of analysts surveyed by Bloomberg. More importantly, JPMorgan Chase & Co. Analysts ranging from Morgan Stanley expect it to raise its full-year sales guidance, justifying another round of price hikes.
Of course Nvidia Corp. As such, TSMC has become a favorite artificial intelligence bet for investors with few other competitors able to replicate its innovative technology. That's giving it the bargaining power to raise prices for its advanced chips as demand picks up. Analysts are playing catch-up in valuations and price targets, with the company hitting $1 trillion in market capitalization in the U.S. earlier this week.
“Investors felt TSMC was a 'pick and shovel' play on the AI theme,” said Jian Shi Cortesi, a portfolio manager at Gam Investment Management, whose largest fund holds the stock at the top. “In my view, AI demand is likely to continue for at least the next few quarters as demand for AI chips currently shows no signs of slowing down.”
Nvidia and Apple Inc. The sole supplier of the world's most advanced chips had previously guided for a low-to-mid 20% rise in full-year revenue. It is increasingly being viewed as overly cautious, especially after its June-quarter sales and earnings reported by rivals such as Samsung Electronics Co. and major customer Broadcom Inc.
On Wednesday, TSMC indicated that sales rose 40% in the second quarter, compared with an average forecast of 36% growth. This is helping to raise expectations among investors.
At the start of the year, the Taiwan-listed stock was valued at 13 times its 2025 price-to-earnings forecast. In a span of six months, it has increased 21 times. Evidence that TSMC is improving its profit margins, analysts say.
“The pace of earnings growth should drive a re-rating of the valuation,” said Kevin Wang, an analyst at Mizuho Securities Asia Ltd., who raised his target price on the Taiwan-listed stock by 17 percent this month. “Margin improvement can take revenue up to 25% or even 30%, so valuation can also increase by at least 25 times.”
Investors will scrutinize TSMC's tone as earnings look for further clues on the recovery in the chip market and trends in AI demand. AI chip orders have helped offset sluggish smartphone sales, which are just recovering from the recession.
Increased demand for high-end smartphones and product upgrades in high-performance computing may lead to higher prices for more advanced semiconductors. JPMorgan estimates that TSMC could raise prices for its latest chips to various customers by 3% to 6%.
“With mid-single-digit price growth in over 50% of revenues, it will contribute more than 100bps to gross margins in 2025,” JPMorgan analysts including Gokul Hariharan wrote in a July 7 note. They expect gross profit margins for TSMC to increase. Jumping to 58 percent next year, higher than consensus estimates.
Still, there are signs that some people have become uncomfortable with his diagnosis. Foreign investors had been net sellers of shares for five straight sessions through Thursday, according to data from the Taiwan Stock Exchange.
According to Bloomberg calculations, its market capitalization is now MSCI Inc. is larger than all Latin American companies combined on the emerging markets benchmark tracked by millions of dollars in global funds.
“Right now, everything is lacking along the AI supply chain,” said Robert Cheng, a Taipei-based analyst at Bank of America. “Taiwan Semiconductor stocks are undervalued. Share prices have gone up a lot, but they have earnings to back them up.
– With help from Arjun Chang and Betty Ho.
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