Shares of Taiwan Semiconductor Manufacturing (TSM 4.89%), or TSMC for short, rose after the semiconductor contract manufacturer once again produced strong revenue growth and issued upbeat guidance as it continues to be an artificial intelligence (AI) beneficiary.
Let's dig into TSMC's results and guidance to determine if not is a good time to but the stock.
An AI winner
TSMC's revenue growth accelerated in Q4, with revenue climbing 37% to $26.9 billion, compared to 36% growth the quarter before. It earnings per American depositary receipt (ADR), meanwhile, soared 56% to $2.24 from $1.44 a year earlier. Both numbers came in solidly ahead of analyst consensus estimates.
AI chips once again helped power TSMC's results, with high-performance computing, which includes AI chips, accounting for 53% of its revenue in the quarter. HPC revenue climbed 19% sequentially. A year ago, the segment accounted for 43% of its revenue.
Smartphone chip sales rose 17% quarter over quarter and represented 35% of its overall revenue. A year ago, smartphone revenue was 43% of its revenue.
The company continues to see its advanced technologies grow, with nodes 7nm and under accounting for 74% of its revenue, up from 69% in Q3 and 67% a year ago. 3nm technology accounted for 26% of total wafer revenue, which was a big jump from 20% last quarter and 15% a year ago.
TSMC once again continued to see nice gross margin expansion, as it has benefited from pricing power and high capacity utilization. This is despite TSMC still seeing some margin compression due to scaling up its newer 3nm technology. Newer technologies initially have lower margins until they reach scale. Overall, gross margins expanded by 600 basis point year over year and 120 basis points sequentially to 59%. The higher its gross margins, the move revenue drops to the bottom line. As such, when gross margins improve, this helps profits grow more quickly than revenue.
Looking ahead, the company forecast Q1 revenue to come in between $25 billion to $25.8 billion. That would represent about 35% year-over-year growth at the midpoint of its guidance range. It projected gross margins to be between 57% to 59% and operating margins between 46.5% and 48.5%. It sees 2% to 3% margin compression as it ramps up some of its newer overseas foundries.
TSMC is looking for full-year 2025 revenue to grow by close to mid 20% levels. It add that it expects revenue for AI accelerators to double in 2025, even though revenue from those chips tripled in 2024.
After spending nearly $30 billion in capital expenditures (capex) to expand its capacity last year, it plans to spend between $38 billion to 42 billion on capex this year. It said its first fab in Arizona has already entered high production volume in Q4, while its new Japanese foundry started production at the end of Q4. It currently has plans for two more facilities in Arizona and one in Germany as well.
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Is TSMC stock a buy?
TSMC continues to deliver excellent revenue and profitability growth. AI chips are helping lead the way, and the company continues to work to add capacity to meet growing AI chip demand. At the same time, its strength in 3nm and 5nm technologies has turned it into the clear leader in high-performance computing, as its competitors have struggled. This in turn is leading to strong pricing power and improved gross margins
From a valuation perspective, the stock now trades at a forward price-to-earnings (P/E) ratio of 24 times based on analysts' 2025 estimates and 20.5 times based of 2026 estimates. Meanwhile, it has a forward price/earnings-to-growth ratio ( PEG ) of under 0.7. A PEG below 1 is generally considered undervalued, while growth stocks often have PEGs higher than that level.
With AI infrastructure and data center growth expected to continue to ramp up and capacity tight, TSMC continues to find itself in an enviable position. It is the go-to manufacturer for advanced chips, and with Intel's and Samsung's struggles, that does not look like it will change anytime soon.
As such, even after the recent run-up following its earnings results, TSMC stock looks like a solid option to buy given its attractive valuation and the opportunity still in front it with the AI infrastructure buildout. Best of all, it will benefit whether customers continue to favor chips like Nvidia's graphic processing units (GPUs) or turn more towards custom AI chips from the likes of Broadcom. Either way, it wins.
