TSMC (TSM.US) shares have recently rebounded to record highs, but this uptrend faces a critical test. Following ASML's (ASML.US) earnings miss that triggered a global chip stock sell-off, the market's attention turns to TSMC's earnings report scheduled for Thursday.
Due to eased concerns over NVIDIA's (NVDA.US) latest artificial intelligence (AI) products and an optimistic outlook for Apple's (AAPL.US) iPhone, TSMC stocks have once again gained investor favor. TSMC's U.S.-listed shares have risen by 30% from their August lows, reaching new highs.
TSMC (TSM.US) shares rebound to new highs before earnings
Market observers have indicated that strong earnings guidance could once again boost the company's stock price after AI-driven preliminary sales for TSMC's latest quarter exceeded expectations. TSMC's comments on demand will be closely monitored, especially following ASML's downgraded performance expectations outside of AI, which triggered a global chip stock decline.
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Kevin Net, Head of Asian Equities at Financiere de L Echiquier, stated that strong guidance and potential comments on demand for 2025 "could push the stock price higher." TSMC's capital expenditure may "ultimately reach the high end of the guidance range, around $32 billion," indicating a robust outlook.
Just a few months ago, investors were offloading AI stocks, worried that the technology would not meet excessively high profit expectations. This year, market expectations for TSMC's earnings per share have climbed by 37%, reaching an all-time high.
TSMC's third-quarter earnings report is expected to show that profitability is indeed improving, with analysts forecasting a gross margin of 54.8%, the highest level in six quarters.
Following TSMC's increase in sales growth targets in July, the company's full-year forecasts will be particularly closely watched. Gary Tan, portfolio manager at Allspring Global Investments, said that the production capacity increase of NVIDIA's Blackwell chips, as well as the progress of TSMC's advanced packaging capacity expansion, are focal points to watch.
Despite the weak outlook from lithography giant ASML reigniting concerns about the entire industry, TSMC is seen as more resilient than ASML. ASML is a major equipment supplier to TSMC. Analysts have stated that TSMC's long-term prospects should not be affected, as the long-term outlook depends on the demand for high-end chips used for training and hosting AI models.
Nomura Holdings analysts, including Aaron Zheng, said last week: "AI continues to be a driver of TSMC's fundamentals and valuation." Any negative impact from non-AI business is limited, "because supply chain construction has been cautious, so we expect a more significant cyclical rebound by 2025."In addition to fundamental factors, some market observers have also warned about geopolitical concerns ahead of the U.S. elections. To hedge against geopolitical risks, TSMC is investing tens of billions of dollars to establish new production bases in the United States, Japan, and Germany.
The market generally expects TSMC's U.S. stocks to rise by 16% in the next 12 months. The valuation is not high, with an expected price-to-earnings ratio of 23 times for its American Depositary Shares, compared to a peak of 34 times in 2021.
As of Wednesday's U.S. stock market close, TSMC rose slightly by 0.19%, after falling 2.6% the day before due to news from ASML.