Taiwan Semiconductor Manufacturing Company (TSM, Financial) recorded a solid beat-and-raise in Q2, prompting an initial buy-the-dip mindset today following the stock's sell-off yesterday due to export restriction concerns. As the world's largest semiconductor foundry, TSM supplies chips for tech giants like NVIDIA (NVDA, Financial) and Apple (AAPL, Financial). The stock reached all-time highs last week before facing turbulence. Despite yesterday's sell-the-news reaction, shares were up roughly 35% since Q1 results in mid-April, reflecting optimism over AI and a recovery year ahead.
Expectations remained high against this backdrop. Concerns over export restrictions to China and China/Taiwan relations led investors to quickly fade TSM's initial pop, pulling back from highs of 2%. If tensions worsen between China and Taiwan, TSM could be significantly affected.
- TSM beat analyst earnings and sales estimates in Q2, with a 34.6% year-over-year revenue jump to $20.82 billion. Margins slipped by 90 bps year-over-year but remained virtually unchanged from Q1. High-performance computing (HPC) shined, leaping 28%, driven by strong AI demand.
- AI remains a key driver for TSM's short and long-term excitement. Management expects solid smartphone and AI-related demand to support business in the next quarter. TSM raised its FY24 revenue outlook to $22.4-23.2 billion from $19.6-20.4 billion, underpinned by high AI-related demand. The company observed greater AI demand from customers over the past three months.
- Given these remarks, it wouldn't be surprising if NVDA delivers another outstanding quarter next month. While TSM's post-quarterly responses haven't correlated much with NVDA's earnings reactions, its AI comments are good news for the state of AI, as GPU makers wouldn't continue ordering more chips without robust end demand.
- Further evidence of strong AI demand is TSM's FY24 capital budget forecast. The high end of the FY24 outlook remains unchanged at $32 billion, but the low end increased from $28 billion to $30 billion. Most of the budget will be allocated to advanced process technologies, many of which are based on HPC products.
Unsurprisingly, AI tailwinds remained strong in Q2, and TSM expects this to continue throughout the year. However, geopolitical concerns are overshadowing AI gains. The Biden Administration announced potential restrictive export controls, possibly halting semiconductor equipment suppliers from providing China access to American technology. Meanwhile, Taiwan may not be guaranteed U.S. intervention amid a Chinese invasion. Until these concerns subside, TSM could face selling pressure.
