Key Points
Demand for artificial intelligence (AI)-related semiconductor chips is booming, and Taiwan Semiconductor Manufacturing (NYSE: TSM), which has a near-monopoly over their production, continues to see its revenue surge. And with the stock trading at a forward P/E of around 20 times next year’s earnings, now looks like a good time to scoop up some shares.
Insatiable AI chip demand continues
As demand for its chip manufacturing services soars, TSMC once again reported climbing revenue and an expanding gross margin when it reported its second-quarter results last week. Revenue jumped 34% year over year to $40.7 billion, while its gross margin came in at 67.6%, up 910 basis points from 58.6% a year ago. The company has continually warned investors that its gross margin would be negatively impacted by moving to more advanced nodes and increased manufacturing in the U.S., but it guided for gross margin to remain robust in Q3, between 65% and 67%.
The combination of revenue growth and gross margin expansion led to its profits surging 77% in local currency.
TSMC generated revenue from 2nm nodes for the first time, accounting for 3% of its total revenue. Meanwhile, 3nm revenue jumped to 30% of total revenue, up from 24% a year ago. Revenue from advanced technology, which includes 7nm nodes or below, accounted for 77% of its revenue. High-performance computing was 66% of its revenue, while smartphones accounted for 22%.
TSMC projected Q3 revenue between $44.6 billion and $45.8 billion, representing about 37% year-over-year growth at the midpoint. For the full year, it projects revenue growth of more than 40%, up from its prior guidance of 30%.
Perhaps more importantly than its strong results and guidance, TSMC also upped its 2026 capital expenditure (capex) budget, taking it to a range of $60 billion to $64 billion, up from a prior outlook of $52 billion to $56 billion. Between 70% and 80% will go toward advanced process technologies, with 10% to 20% toward advanced packaging and 10% for specialty technologies.
Why TSMC stock is a buy
TSMC is at the center of the AI infrastructure build-out, and its increased capex plans are a strong indication that demand is here to stay. Given the nature of the chip manufacturing business, where underutilized fabs become big earnings drains, management tends to perform deep due diligence, so this isn’t only a good sign for TSMC, but for the AI infrastructure industry as a whole.
Given its attractive valuation, monopolistic positioning, and strong growth prospects, TSMC looks like a great AI stock to own at these levels.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
