Why Taiwan Semiconductor Stock Is Falling After Earnings

Taiwan Semiconductor Manufacturing Company (TSM) stock fell nearly 6% out of the gate Thursday despite the company beating analysts' top- and bottom-line estimates for its first quarter.

In the three months ended March 31, the Taiwan-based chip manufacturer, whose clients include Magnificent 7 stocks Nvidia (NVDA) and Apple (AAPL), said revenue increased 12.9% year-over-year to $18.9 billion. 

Earnings per share (EPS) were up 8.9% to $1.38 from the year-ago period. TSM also reported a gross margin of 53.1% and an operating profit margin of 42%, down from 56.3% and 45.5%, respectively, in the year-ago period.

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The results exceeded analysts' expectations for revenue of $18.4 billion and EPS of $1.32, according to Yahoo Finance.

The results also exceeded or met the guidance TSM provided earlier this year, which called for revenue in the the range of $18 billion to $18.8 billion, a gross margin of 52% to 54% and an operating profit margin of 40% to 42%. 

"Our business in the first quarter was impacted by smartphone seasonality, partially offset by continued HPC-related demand," TSM's senior vice president and chief financial officer Wendell Huang said in a statement. "Moving into second quarter 2024, we expect our business to be supported by strong demand for our industry-leading 3 nanometer and 5 nanometer technologies, partially offset by continued smartphone seasonality."

Taiwan Semiconductor also provided its outlook for the second quarter of 2024, calling for revenue in the range of $19.6 billion to $20.4 billion, a gross profit margin of 51% to 53% and an operating profit margin in the range of 40% to 42%. As a point of reference, the company reported Q2 2023 revenue of $15.7 billion, a gross margin of 54.1% and an operating profit margin of 42%.

"Almost all the AI innovators are working with TSMC to address the insatiable AI-related demand for energy-efficient computing power," C.C. Wei, CEO of Taiwan Semiconductor, said on the company's conference call. "We forecast the revenue contribution from several AI processors to more than double this year and account for low-teens percent of our total revenue in 2024."

So why is Taiwan Semiconductor stock lower?

Despite the strong earnings results from TSM, the semiconductor stock, as noted, is trading notably lower today. The reason for this, according to several media reports, is that the company made a slight change to its 2024 semiconductor outlook.

Specifically, TSM now expects total growth of "approximately 10% year-over-year," excluding memory chips, Wei said in the conference call, vs previous expectations for growth of "more than 10%."

Is TSM stock a Buy or a Sell?

Analysts are very bullish on the semiconductor manufacturer. According to S&P Global Market Intelligence, the consensus analyst target price for TSM stock is $155.17, representing implied upside of about 15% to current levels. Additionally, the consensus recommendation is a Buy.

One analyst that's upbeat toward the tech stock is Charles Shi at Needham, who has a Buy rating on TSM and a $168 price target. This stands more than 25% above Taiwan Semiconductor's current price.

"We look for TSMC's revenue growth, primarily driven by steady introductions of new technology nodes that are largely unaffected by industry cyclicality, to remain strong and support a 15-20% earnings CAGR [compound annual growth rate] over the next few years," Shi says. "As such, we recommend TSMC stock as a core holding for investors who look to invest in semiconductors, which we view as the foundation of the expanding digital economy."

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