Second-quarter revenue rose 36% when ignoring currency moves, to $40.2bn ($39.0bn expected). Growth was supported by strong demand for leading-edge technologies, particularly in high-performance computing, which accounted for 66% of revenue.
Operating profit increased 65% to $24.3bn ($22.1bn expected), helped by operating expenses growing at a slower pace than revenue and improved gross margins.
Free cash flow rose 44% to $9.1bn, and net cash stood at $79.4bn at the end of the period.
Third-quarter revenue is forecast to land between $44.6-45.8bn ($42.8bn expected). The full year capital expenditure guide has been raised, now expected between $60-64bn.
Currency = US dollar.
The shares were down 2.2% in pre-market trading.
Our view
This was another positive set of numbers from TSMC. As usual, management sounded confident about demand, with annual revenue now expected to grow above 40% (previously above 30%), and the investment budget increased again to meet customer appetite. If there was one minor niggle, it was the slightly low margin guide for the coming quarter, but we saw nothing to detract from the strong setup ahead.
TSMC is the world’s leading semiconductor manufacturer, producing and assembling chips for clients like NVIDIA, ARM, and Apple. Microchips are among the most complex devices ever created, and they continue to grow more intricate. TSMC is typically cautious on capacity given the industry’s boom-and-bust cycles, so aggressive capacity expansion plans help underpin our thesis that the AI infrastructure buildout is still early.
TSMC’s dominance rests on technology leadership and manufacturing excellence. Its Taiwan plants are the gold standard, but expansion into the US and Japan aims to diversify supply. Costs are higher abroad, and margins will face pressure as new sites ramp up, yet TSMC has managed this well so far.
Competition is intensifying, pushing TSMC to accelerate its pursuit of cutting-edge technology. US sites once lagged a generation behind Taiwan, but that’s changing as rivals like Intel chase the bleeding edge with government backing.
TSMC is pledging an additional $100bn of investment in the US, and although there’s been no explicit timeline, we think it’s wise to lean into the US administration's desire to onshore chip production. We believe TSMC remains the clear leader, and these faster expansion plans should help preserve its dominant position.
Tensions between Taiwan and China are an ever-present threat. This remains an ongoing risk factor that is difficult to quantify. There’s also the potential impact of higher costs from the Middle East conflict but nothing that management has given any firm guidance on yet.
Capex spend is typically an indicator of future revenue potential, so we take the upped investment guide and strong customer demand signals as good indicators for the coming years. Plus, TSMC’s investment plans are well supported by a strong balance sheet and impressive cash flows.
TSMC is an exceptional business, and with the AI buildout acting as a tailwind, the price-to-earnings multiple is near historic highs. We think that’s sustainable, and the outlook is positive if revenue and profits pan out as expected. But with optimism now priced in, there’s pressure to deliver, and a slowdown in AI adoption remains the key risk to consider.
Environmental, social and governance (ESG) risk
The semiconductor sector is medium-risk in terms of ESG. Overall, this risk is managed adequately in Europe and North America but has considerable room for improvement in the Asia-Pacific region. Its reliance on highly specialised workers means that labour relations is one of the key risk drivers. Other risks worth monitoring include resource use, business ethics, product governance, and carbon emissions.
According to Sustainalytics, TSMC’s management of material ESG issues is strong.
TSMC has a company-wide target to reach net zero by 2050 and plans to use 40% renewable energy for all fab operation sites by 2030. Its latest products promise to deliver substantial energy efficiencies for end users. TSMC incorporates water scarcity and flooding into its enterprise risk management, but its water intensity is well above the industry median, suggesting that there is room for improvement. Skill shortages are an industry-wide issue, but TSMC has a strong commitment to talent development and staff retention has been moving in the right direction.
TSMC key facts
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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