Taiwan Semiconductor Stock: Buy, Sell, or Hold After Earnings?

Taiwan Semiconductor Manufacturing (TSM) is among the hottest stocks on the planet. The Taiwan-based manufacturer produces advanced chips that power smartphones and artificial intelligence (AI) applications like ChatGPT, including semiconductor chips for companies including Nvidia (NVDA) and Apple (AAPL). Like Nvidia, TSMC is a chip giant at the epicenter of the AI megatrend. 

The company enjoys a wide moat, as it is the largest chip manufacturer in the world. The tech giant reported blowout Q3 results earlier this week, comfortably beating consensus revenue and earnings estimates, and driving TSM stock higher by 9.8% on Thursday. This latest uptick in the share price has pushed TSM into the trillion-dollar market cap club, joining other big tech behemoths. 

Notably, TSM also pays shareholders a quarterly dividend of $0.62 per share, translating to a forward yield of 1.13%. After adjusting for dividend reinvestments, cumulative returns for TSM stock exceed 1,100% in the past decade. 

TSM has generated market-beating returns for long-term investors, but let’s see if the chip maker is still a top investment option at the current valuation. 

TSMC: A Strong Performance in Q3 of 2024

In the September quarter, Taiwan Semiconductor reported revenue of $23.5 billion, an increase of 37% year over year. Net income of $10.1 billion increased 54% year over year, and surpassed consensus estimates by almost 10%.

In Q3, TSM's gross margins widened to 57.8%, up from 54.3% in the year-ago period. In Q3, its business was supported by solid smartphone and AI-related demand for its industry-leading 3nm and 5nm technologies. 

For the current quarter, management now expects revenue between $26.1 billion and $26.9 billion, indicating a 35% increase at the midpoint of the range. 

During the earnings call, Taiwan Semiconductor Chairman and CEO C.C. Wei noted that AI demand is significant: “We have talked to our customers all the time, including our hyperscaler customers who are building their own chips. And almost every AI innovator is working with TSMC.”

What's Next for TSM Stock?

According to a research report from International Business Strategies, the AI chip market is forecast to almost triple between 2023 and 2025, while the semiconductor market is projected to expand by 30% in this period. 

Taiwan Semi might already be a massive player in the space, but it's looking to expand. In early 2024, TSM opened its first factory in Japan, showcasing that AI-related tailwinds are here to stay. The company is also expanding its manufacturing presence in the U.S., and will spend $65 billion to set up three facilities in Arizona. 

The chip giant spent $6.4 billion in capital expenditures in Q3 of 2024, up from $6.36 billion in the June quarter. TSM expects its capital expenditures to exceed $30 billion in 2024. 

Is TSM Stock Undervalued?

Out of the 10 analysts covering TSM stock, eight recommend “strong buy,” one recommends “moderate buy,” and one recommends “hold.” 

The average target price for TSM stock is $204.71, which indicates minimal upside from current levels. 

However, analysts tracking Taiwan Semiconductor estimate adjusted earnings to grow from $5.19 per share in 2023 to $8.03 per share in 2025. So, priced at 25.3 times forward earnings, the blue-chip tech stock looks reasonably valued, given its earnings growth forecasts.

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On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.