(Bloomberg) — Taiwan Semiconductor Manufacturing Co.’s $420 billion rise in equity this year will face a valuation test next week when it reports earnings, with analysts expecting the chipmaker to raise sales forecasts for the entire year.
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The world’s largest contract chipmaker is likely to report a 29% increase in second-quarter net profit on Thursday, according to the median estimate of analysts surveyed by Bloomberg. More importantly, analysts from JPMorgan Chase & Co. to Morgan Stanley expect it to also raise its full-year sales guidance, justifying another round of valuation expansion.
Like Nvidia Corp., TSMC has become the favorite artificial intelligence bet for investors, with few other competitors able to duplicate its cutting-edge technology. This gives you the negotiating power to increase the prices of your advance chips as demand increases. Analysts have been playing catch-up on valuation and price targets, with the company reaching a market capitalization of $1 trillion in the US earlier this week.
“Investors have realized that TSMC is the ‘pick and shovel’ play on the AI theme,” said Jian Shi Cortesi, portfolio manager at Gam Investment Management, whose largest fund has the stock as its top holding. “In my opinion, demand for AI can be sustained for at least the next few quarters, as demand for AI chips currently shows no signs of slowing down.”
The sole supplier of Nvidia and Apple Inc.’s most advanced chips had previously called for full-year revenue to grow around 20%. That is increasingly seen as too cautious, especially after sales surpassed the June quarter and earnings reported by competitors such as Samsung Electronics Co. and top customer Broadcom Inc.
On Wednesday, TSMC indicated that second-quarter sales increased 40%, compared to average forecasts for a 36% increase. This is helping to raise expectations among investors.
At the start of the year, Taiwan-listed stocks were valued at 13 times their 2025 P/E forecast. Within six months, that number jumped to 21 times. Proof that TSMC is improving its profit margins will further increase this, analysts said.
“Accelerating earnings growth should drive valuation reassessment,” said Kevin Wang, an analyst at Mizuho Securities Asia Ltd, who raised his price target on Taiwan-listed shares by 17% this month. “The margin improvement could see profits grow by 25% or even 30%, so the valuation could also expand to at least 25x.”
Investors will be scrutinizing TSMC’s tone in its earnings release for more clues about the recovery in the chip market and AI demand trends. Orders for AI chips have helped offset weak smartphone sales, which are just recovering from a slump.
An increase in demand for high-end smartphones and product upgrades in high-performance computing could lead to an increase in prices for the most advanced semiconductors. JPMorgan estimates that TSMC could increase prices by 3% to 6% for several customers of its most advanced chips.
“With mid-single-digit price growth at more than 50% of revenues, this should also contribute more than 100 basis points of gross margin growth in 2025,” JPMorgan analysts including Gokul Hariharan wrote in a dated note of July 7th. jump to 58% next year, above consensus estimates.
Still, there are signs that some are concerned about his assessment. Foreign investors sold net shares for five consecutive sessions through Thursday, according to data from the Taiwan stock exchange.
Its market capitalization now far exceeds the combined size of all Latin American companies in MSCI Inc.’s emerging markets benchmark index, which is tracked by millions of dollars in global funds, according to Bloomberg calculations.
“Right now, everything is missing along the AI supply chain,” said Robert Cheng, an analyst at Bank of America in Taipei. “The valuation of Taiwan semiconductor stocks is not high. Stock prices have gone up a lot, but they have profits to sustain.”
–With assistance from Argin Chang and Betty Hou.
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