Taiwan Semiconductor Manufacturing (TSMC) has experienced a challenging start to 2025, despite initial optimism. The company, renowned for its semiconductor foundry services, has seen its stock price fall by over a third from its 52-week high on January 24. This decline is largely attributed to negative sentiment across tech stocks, influenced by tariffs imposed by the Trump administration. There are concerns that these tariffs will elevate manufacturing costs for technology products made outside the U.S., subsequently increasing expenses for AI data centers and causing tech companies to limit their spending.
The tariffs are also expected to impact the growth of the U.S. economy, fueling recession fears which have further affected TSMC’s stock performance this year. However, an analysis of the company’s sales in the first two months of 2025 suggests potential for recovery, especially with the upcoming release of its first-quarter earnings on April 17.
TSMC’s revenue growth in the first two months of 2025 is notable, showing a 39% increase compared to the same period the previous year. This positions the company to potentially exceed its revenue guidance for the first quarter. In January, when TSMC reported its fourth-quarter 2024 results, it projected $25.4 billion in revenue for Q1 2025, representing a 34% year-over-year increase. This was a marked improvement over the 13% growth recorded the year prior. The current growth trend suggests TSMC might surpass its own expectations.
Earnings are also anticipated to rise significantly, with TSMC forecasting a 5.5 percentage point increase in its operating margin. Analysts are predicting a 49% jump in Q1 earnings from the previous year to $2.05 per share, driven by strong AI chip demand. TSMC’s sales surge is largely due to the increasing demand for AI chips, utilized in various applications such as data centers, smartphones, PCs, and automotive. Nvidia, a major customer of TSMC, recently reported unprecedented demand for its Blackwell AI graphics processing units, which TSMC manufactures. Nvidia has reportedly secured over 70% of TSMC’s advanced chip packaging capacity to meet this demand.
TSMC has been expanding its AI chip production capacity to accommodate Nvidia’s orders, with advanced chip packaging module shipments reportedly increasing by 20% each quarter. Plans are in place to add two more facilities to boost supply. Nvidia expects a 65% revenue increase in the current quarter, primarily from its AI data center chip sales. Together with TSMC’s supply chain improvements, this points to a potentially strong quarterly performance and optimistic guidance that could exceed Wall Street expectations.
Moreover, other AI chip companies like Broadcom and Marvell Technology have also forecast exceptional sales growth. Both companies are profiting from the increasing demand for custom AI processors, which TSMC manufactures. Similarly, Advanced Micro Devices, another TSMC client, is experiencing rising demand for CPUs used in PCs, a market benefitting from generative AI.
Taiwan Semiconductor appears well-positioned to capitalize on the secular growth of the chip market, particularly due to AI. Currently, TSMC stock is trading at less than 25 times trailing earnings, with a forward earnings multiple of under 19, suggesting strong bottom-line growth. These valuations are more attractive than the Nasdaq-100 index’s price-to-earnings ratio of around 29.
Analysts predict a 29% increase in TSMC’s earnings in 2025 and have raised their growth expectations for the coming years. The company is forecasting a compound annual growth rate of 20% in revenue over the next five years. As such, investors looking for an AI stock with the potential for strong long-term returns and currently trading at an appealing valuation might consider investing in TSMC before its stock price potentially rises.
