Semiconductor Giant Posts Big Earnings Beat, but Shares Stay Flat

Key Points

• TSMC reported earnings on Jul. 18, 2024, beating EPS and revenue.
• Comments made by former President Trump have hurt the company's shares over the past few days.
• Shares could react further following Trump's expected speech at the Republican National Convention.

Taiwan Semiconductor Manufacturing NYSE: TSM, known by the acronym TSMC, is the world’s second-largest company in the semiconductor industry. Let’s examine TSMC's operations and review the company’s earnings release. We will conclude by examining the market reaction and what to watch for going forward.

TSMC: Dominating the Advanced Logic Chip Market

TSMC is the world’s largest semiconductor fabrication company. It sells around 92% of the world’s advanced logic chips, defined as those with transistor node sizes of 10 nanometers or less. Samsung OTCMKTS: SSNLF and Intel NASDAQ: INTC are two other firms making chips this size. However, Intel does not sell chips to other companies. It only uses them in its own products.

It also makes the world's most advanced logic chips based on transistor node size, with smaller ones being more advanced. It currently makes 3-nanometer chips and is developing 2-nanometer chips. North America accounts for 68% of the firm’s revenue. China, the Asia Pacific, EMEA (Europe, Middle East, Africa), and Japan each comprise 12% to 8% of revenue.

The company also categorizes its revenue by chip platform. These include high-performance computing (HPC), smartphones, the Internet of Things, automotive, digital consumer electronics (DCE), and others. HPC and smartphone platforms together make up the majority of revenue, accounting for 43% and 38%, respectively, in 2023.

In relation to the growth of artificial intelligence, the HPC platform is most significant. Graphics processor units (GPUs), application-specific integrated circuits (ASICs), and personal computer central processing units (CPUs) are products within this platform specifically made for AI applications.

TSMC Stock Plummets Following Comments by Former President Trump

The day before the release, various semiconductor stocks, including TSMC, saw their share prices plummet. TSMC's stock price was negatively affected by former President Donald Trump's comments in an interview with Bloomberg.

He said, “I think Taiwan should pay us for defense," referring to the U.S. providing the island nation with security against China. The former president implied that he feels Taiwan owes the United States, saying, “They did take about 100% of our chip business.”

He added that he disapproved of the U.S. giving TSMC, a foreign company, subsidies to build factories in America. Charging Taiwan for defense or imposing protectionist policies against the country would hurt TSMC. This led to the stock price falling 7%.

TSMC Surpasses Q2 Earnings and Revenue Expectations

TSMC beat on earnings per share (EPS), coming in at 9.56 New Taiwan dollars (NTD), approximately 30 cents in US dollars. This was 5.6% higher than expectations of 9.05 NTD and up 36% from the previous year. It also beat on revenue, coming in at 673.51 billion NTD, compared with expectations of 656 billion NTD. This was a 40% increase from last year.

The most growth came from the HPC platform, which increased by 28%. DCE revenue also grew solidly by 20%. The company also saw its most advanced chips, 3 nanometers, increase its share of total revenue. The chips accounted for 9% of total revenue in the previous quarter; that number increased to 15%.

Gross and operating margins were higher than predicted by the firms' guidance: gross margin was 53.2%, and operating margin was 42.5%. The high end of the guidance ranges were 53% and 42%. The company increased its revenue guidance for Q3 2024 to between $22.4 billion and $23.2 billion USD.

Other positive results included a solid reduction in inventory and accounts receivable (A/R) turnover days. Inventory turnover measures how long it takes the firm to sell its inventory. A/R turnover measures how long it takes to convert sales bought on credit to cash. Inventory turnover days decreased by 8% and A/R turnover days decreased by 10%, from the previous quarter.

All Eyes on Trump's Expected RNC Speech

After the release, shares jumped as much as 4% intraday. However, gains pared back to less than 1% by the close. During the earnings call, analysts asked CEO C.C. Wei if the company would consider a joint venture for its foundries in the United States. The remarks made by Trump prompted this question. He said they have no plans to do so.

The lack of price increase after a positive earnings report may be due to uncertainty about how Trump might respond to that statement and what else he might say about Taiwan. He is expected to speak Thursday night at the Republican National Convention.

Semiconductor investors should keep their ears perked up on the Republican nominee’s words.