- TSMC earnings and sales beat forecasts, providing relief to the market after ASML’s disappointing results triggered a sell-off across the chip space
- Strong margin progression and guidance for further gains
- Relationship between TSMC and Nvidia under the spotlight
“The fate of the global stock market hinged on TSMC’s results and fortunately everything is fine in AI land,” says Dan Coatsworth, investment analyst at AJ Bell.
“ASML’s shock announcement earlier this week spooked investors holding anything linked to the semiconductor industry and raised concerns that all wasn’t well in the sector. While ASML said its challenges were outside of the AI space, the market took an indiscriminate view and marked down stocks like Nvidia which some might have thought to be unaffected.
“It is fair to say that as the biggest investment theme of the past two years, any disappointment involving the key players in the AI craze could cause shockwaves across the entire market.
“Should TSMC have come out with a gloomy outlook in its results, or even the smallest hint that AI demand was losing momentum, we might have seen another wobble among tech stocks and investor confidence wane. Contagion could have spread across the markets and caused another sell-off like we saw in the summer.
“As it stands, TSMC said demand was strong for both AI-related business and from smartphones, implying that the chip sector still has momentum. Nvidia is one of TSMC’s major customers so there is a direct read-across to the American chip firm in the Taiwanese company’s results. Whether their relationship is healthy is another thing.
“There is speculation that Nvidia has experienced more problems with its new Blackwell chips and that it is pointing the finger of blame at TSMC, and that the Taiwanese partner has done the opposite. At the same time there is chatter that Nvidia might be looking to reduce its reliance on TSMC and potentially use Samsung for new gaming chips at a cheaper price. That’s relevant because pricing is a live issue for the Taiwanese group.
“TSMC’s gross margins have gone from 53.2% in the second quarter of 2024 to 57.8%, attributed to more production capacity being used and cost improvements. It has guided for margins to be as high as 59% in the fourth quarter, which is good news for the company but potentially bad for customers. It is understood that TSMC was already planning to put up its prices in 2025 so it could be pulling the trigger slightly earlier, which might explain the expected margin improvements.
“The expected improvement with gross margin might not be down to pricing; it might simply be higher throughput and more cost efficiencies, or it could be down to the mix of earnings and producing more chips that sell for a premium price.
“TSMC is spending billions of dollars to expand production capacity as it sees big opportunities to capitalise on increased demand. If Nvidia moves some of its business to a rival, investors might worry that TSMC is left with too much capacity. It’s something to watch closely but the jump in its share price in US pre-market trading would suggest that investors are still fired up by the potential for the company to ride the AI trend for years to come.”
