TSMC Earnings Recap: Strong Fundamentals, One Big Risk

TSMC's earnings just dropped, and after combing through the numbers, nothing really jumped off the page. Revenue came in slightly better than expectations at about $25.5 billion, down around 5% quarter-over-quarter due to the typical smartphone seasonality, but still cushioned by strong ongoing AI demand. Gross margins dipped a touch to 58.8%, mostly because of an earthquake in January and the ramp-up of their overseas fabs, particularly the one in Japan.

Digging a bit deeper, their advanced technology nodes continue to dominate—3nm chips made up 22% of total wafer revenue, and 5nm accounted for 36%. Together with 7nm, these advanced nodes represent a hefty 73% of TSMC’s wafer revenue, highlighting their continued tech leadership. From a platform perspective, HPC remained strong, growing 7% QoQ and making up nearly 60% of total revenue, fueled heavily by ongoing AI chip demand. Smartphones predictably slowed down, down 22%, reflecting the usual post-holiday lull. Automotive was a bright spot, up 14%, while IoT demand softened slightly.

Management provided a pretty solid outlook for Q2, with revenue growth expected to bounce back strongly, up around 13% sequentially, driven primarily by continued robust demand for their leading-edge 3nm and 5nm chips. They reaffirmed full-year revenue guidance in the mid-20% growth range, significantly outpacing the overall industry (projected at around 10%). AI accelerator revenues, specifically GPUs, ASICs, and HBM controllers for data centers, are still on track to double year-over-year, reinforcing that AI-driven demand isn't slowing anytime soon. Capital expenditures for 2025 are set between $38 billion and $42 billion, with 70% allocated to advanced process technologies. From a readthrough perspective for CSPs, the persistent strength in HPC and AI accelerator demand is clearly positive for hyperscalers and companies in the CSP ecosystem. TSMC's ongoing capacity expansions, especially around advanced packaging solutions like CoWoS, which they've been scrambling to double capacity for, signal continued heavy investment by CSPs in next-gen AI infrastructure.

TSMC is aggressively doubling down overseas, particularly in Arizona. They announced another $100 billion investment there, bringing their total planned commitment to $165 billion, including additional fabs and advanced packaging facilities. This expansion, backed strongly by key U.S. customers like APPL, NVDA, AMD, QCOM, and AVGO, indicates a strategic bet on localized semiconductor supply chains. Overseas fabs will hit margins by roughly 2-3% in 2025, potentially widening further as geopolitical complexities and tariff risks linger. Operationally, the company handled January’s 6.4 magnitude earthquake just fine, quickly recovering lost wafer production thanks to round-the-clock efforts, minimizing customer disruptions. TSMC’s tech roadmap also remains compelling with 2nm production is still set to ramp later this year, promising significant performance and energy efficiency improvements. They’re already outlining follow-on nodes like N2P and A16, set to further push boundaries in the HPC and AI spaces.

Overall, while the report wasn't eye-opening but the variance in possible outcomes has definitely widened given the increasing complexity of geopolitical tensions, global expansion costs, and potential tariff impacts. The numbers this quarter were solid but not game changing, and that’s kind of the point. The stock didn’t need a beat to look interesting given the cheap multiple and negative news priced in. At current levels, TSMC is trading around 13-14x forward PE and under 24x EV/FCF. The valuation also looks cheap on a relative basis when you consider that it's the foundry with >50% global market share, deep customer entrenchment, and technology leadership that no one else can really touch right now. Add to that the fact they’re guiding to mid-20% revenue growth for the full year and still expect AI-related revenues to double YoY, and it’s tough to find another large-cap semi with that combo of growth and quality trading under a 20x multiple. But all of that brings us to the one obvious and ever-present elephant in the room: China. The geopolitical overhang is still very real. If China invades Taiwan, valuations go out the window. The stock would likely get crushed regardless of how well the business is performing or how important it is to the global tech stack. It's the classic geopolitical risk premium, and no matter how bullish you are on AI or semis more broadly, it’s hard to ignore. So yeah, TSMC looks cheap. It’s executing, growing and powering the most critical part of the modern economy, but it also sits on a geopolitical fault line, and until that’s resolved, that discount is probably going to stick to a certain degree.