TSMC: Long-Term Outlook Still Strong as Geopolitical Risk Rises

Key Points

• Taiwan Semiconductor Manufacturing's shares rose after its better-than-expected Q4 earnings.
• However, new U.S. chip controls could result in downside over coming quarters. 
• TSMC stock remains a strong long-term play amid near-term uncertainty.

Taiwan Semiconductor Manufacturing NYSE: TSM did it again in its latest earnings release. The company impressed markets with its Q4 results, sending shares up significantly on the day. The report marked the 14th consecutive quarter of the company, beating estimates on adjusted earnings per share (EPS).

The world’s king of chip manufacturing continues to show strength, which is supported by the demand for advanced node technologies. Below, I’ll dive into more specific details of the report and put them in the context of my overall outlook on Taiwan Semiconductor Manufacturing Company, also known as TSMC.

TSMC Shares Rise on Rock-Solid Earnings

Overall, the TSMC report was filled with positive developments. This included revenues that rose 37% from Q4 2023 and an increase of over 14% from Q3 2024. The company also expanded margins significantly, both from the prior year and from the previous quarter. Particularly strong was the increase in operating margin of 740 basis points over 2023. Advanced node sales, which describe wafers made using seven nanometers (nm) or smaller technology, are important.

Lower nanometer chips can perform more advanced tasks as more transistors are able to fit on the same surface area. This increases their computational power while also driving more efficient energy usage. These seven nm and smaller technologies largely overlap with the end-use case of high-performance computing (HPC). For the full year, HPC sales contributed 51% of total revenue and had by far the highest growth rate of 58%.

As with many firms with high expectations behind them, beating estimates alone often isn’t enough to make shares rise. Providing strong future guidance is also very important. For Q1 2025, TSMC also checked that box. Although it sees revenues and margins contracting noticeably from Q4, the figures still exceeded expectations. Much of this slowdown is due to seasonally low demand for smartphones after the holidays.

Although the company’s financial results are unlikely to be as high-flying as in 2024, TSMC still expects to have a very good year in 2025. The company sees mid-20s percentage revenue growth. It also sees revenue from AI accelerators doubling in the year after they over-tripled in 2024.

Breaking Down Key Geopolitical Risk: United States vs. China

One of the largest risks many point out regarding TSMC is geopolitical tensions between the United States and China. The United States has made strong efforts to limit China’s access to advanced semiconductor technology, imposing bans on certain products to the country. On Jan. 15, President Biden issued further controls to keep advanced chips out of the hands of the Chinese. It seems to be a significant near-term risk despite TSMC management’s dismissal of the effects as minimal.

Hedge fund manager and founder of J and J Investment, Jonah Cheng, sees the new rules potentially having a significant impact on TSMC’s business. He estimates they will have at least a 7% impact on TSMC revenues, as it also includes restrictions on automotive chips. If controls further extend to bitcoin mining chips, that impact could reach north of 15%. On the other hand, TSMC stated that only 12% of its revenue came from China in 2023. However, accounting nuances affect what a company counts as revenue from a certain country. They can differ from how analysts calculate the figure.

It will be interesting to see what revenue percentage TSMC attributes to China in its next annual report, the 20-F filing. This report should come out in mid-April. In its earnings call, TSMC management likely assuaged some fears around this risk. They said they are applying for special permits to prevent non-AI customers from being affected by the effects. If it can secure those, the company’s revenue impact may be as little as 4%, based on Cheng’s analysis.

TSMC: Long-Term Winner Facing Near-Term Headwinds

Overall, TSMC still maintains an incredibly wide moat in advanced chip manufacturing, securing its position as a leading firm for the foreseeable future. The company is also making significant efforts to please the U.S. government. Production of its four nm process is set to begin in its Arizona fab in the first half of 2025. It also plans to have another fab in the state with even more advanced processes available by 2028.

Still, government controls could result in short-term volatility. This is especially true considering the uncertainty around what Trump administration might do. Ironing out the details of running its new chip fab in the United States could also result in operational hiccups. Overall, I remain bullish on TSMC stock long-term; however, these are important near-term risks to consider.