Taiwan Semiconductor Soars on Earnings With More Room to Run

Key Points

• Taiwan Semiconductor Manufacturing stock is the latest semiconductor name to report quarterly earnings results.
• Figures and price action show how robust demand is for the rest of the industry, where investors can remain bullish for longer.
• Wall Street analysts see another double-digit run in the name and the sector, and bears are capitulating more.

Many investors still hold high regard for the technology sector in the United States today, which makes sense as the services PMI index is carrying most—if not all—of the economic growth left in the country, compared to the 23-month contraction in the manufacturing sector, as seen in that PMI index. However, not all technology sectors are equal.

The semiconductor and chipmaking niche of the sector receives special attention, which has been present all of 2024 and extrapolated since the shortages seen since the COVID-19 pandemic. In recent quarters, all the pressure seems to have been placed on shares of Taiwan Semiconductor Manufacturing Co. NYSE: TSM, the global leader in chip sales with major customers all over the sector.

However, investors might have been concerned after seeing NVIDIA Co. NASDAQ: NVIDIA sell-off after its last quarter, which announced a state of “lots and lots of supply,” according to its CEO, which would ultimately hurt margins and earnings per share (EPS). More recently, ASML Holding NASDAQ: ASML stock sold off by over 17% in a single day after missing booking guidance.

Taiwan Semiconductor Stock Soars 12%: Strong Earnings and Growing Demand Fuel Rally

To ease some of the ASML and NVIDIA concerns, Taiwan Semiconductor stock rallied by over 12% in a single day following the blowout earnings results posted. This may have caused a surprise figure to outperform some of its peers during the quarter.

Investors would have been ready for this rally by looking at a few metrics beforehand. Some of these metrics include the monthly revenue growth rate and the fact that markets were willing to pay a premium valuation only to get exposure to the company’s future earnings, which is often a bullish sign.

Building on these views that investors enjoyed the rally, here’s what investors can now keep in mind moving forward and decide whether there is still further upside left in Taiwan Semiconductor stock. To start with revenue, the company’s earnings press release shows a jump of 39% over the past 12 months.

Then, investors can lean on the fact that the company’s net income jumped by 54% during the quarter to significantly boost potential valuation targets from Wall Street analysts. But that’s all in the past; in order to accurately predict the stock’s value, investors need to look into the future.

Easing some of the fears of demand from the industry, the company’s CEO said, “Demand is real, and I believe it’s just the beginning,” speaking of other peers in the space like NVIDIA. These words were quantified further after the statement, though management guidance to blow most expectations out of proportion.

Revenue projections, even after a 54% jump over the past quarter, are still expected to outpace current guidance projections. For the next quarter, Taiwan Semiconductor management expects to deliver up to $26.9 billion in revenues compared to the estimate of $24.9 billion.

Not only is revenue expected to rise by another double-digit rate, but here’s where valuations can be boosted in the coming months. Gross margins are guided to land nearer to 57% against the former consensus of 54.7%, which speaks to the state of pricing power present in the industry as demand outpaces supply to help costs and prices.

Wall Street Weighs in on Taiwan Semiconductor Stock: What Investors Can Expect Next

Recently, analysts at Needham & Co. decided to reiterate their “Buy” rating on Taiwan Semiconductor stock on the day of earnings. Still, their valuations seem a bit out of touch. They see the stock going to $210, which is still roughly a dollar lower than where it rallied.

More significant is the previous price target set by those at Susquehanna in August 2024. Those analysts saw a “Positive” rating for the stock, this time boosting their targets and valuation up to $250 a share to call for a further 18.5% upside from where the stock trades today.

Realizing that the demand trends might favor more profitability and margins in the industry, bearish traders decided to step away from the market during the past quarter. Taiwan Semiconductor stock’s short interest has declined from $5.6 billion at the peak of last quarter to $4.5 billion today.

As the stock rallies by double-digits this week, more short sellers might be forced to cover their positions and add additional buying pressure to a stock whose bullish momentum seems to just be getting started.