Taiwan Semiconductor Manufacturing (TSM +6.30%), popularly known as TSMC, is having a forgettable 2025 so far despite starting the year on a bright note. Shares of the foundry giant have slipped by more than one-third from the 52-week high they achieved on Jan. 24.
TSMC's pullback is a result of the overall negativity in tech stocks on the back of the tariffs imposed by the Trump administration. It is feared that the tariff war will lead to an increase in manufacturing costs for technology companies that make products outside the U.S., bumping up the cost of deploying artificial intelligence (AI) data centers and forcing tech giants to rein in their spending.
NYSE: TSM
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Additionally, tariffs are expected to negatively affect the U.S. economy's growth, which explains why there has been an increase in the probability of a recession. All these factors have weighed on TSMC stock this year.
However, a closer look at the company's sales in the first two months of the year suggests that the stock could come out of the rut it is in. Specifically, it won't be surprising to see TSMC stock stepping on the gas once again following the release of its 2025 first-quarter earnings report on April 17.
Let's see why TSMC is poised to deliver stronger-than-expected results and guidance this month.
TSMC's sales are growing at a nice clip
Taiwan Semiconductor's revenue in the first two months of 2025 increased at an impressive pace of 39% when compared to the first couple of months of last year. At this pace, TSMC seems well on its way to exceeding its revenue guidance for Q1 2025.
When TSMC released its fourth-quarter 2024 results in January this year, the company guided for $25.4 billion in revenue for Q1 at the midpoint of its range. That would translate into a year-over-year increase of 34%, a big improvement over the 13% revenue growth it delivered in the year-ago period. However, Taiwan Semi's growth trajectory for the first two months of the year indicates that it could end up outperforming its own expectations.
Meanwhile, earnings should also grow at a terrific pace, considering that TSMC is expecting a year-over-year jump of 5.5 percentage points in its operating margin. Not surprisingly, analysts are expecting a 49% increase in Q1 earnings from the prior-year period to $2.05 per share, though it could do better than that considering the robust AI chip demand.
TSMC's surging sales can be attributed to the rapidly growing demand for AI chips that are now being deployed in multiple applications ranging from data centers to smartphones to personal computers (PCs) to automotive. Nvidia, which is one of TSMC's top customers, reported recently that it is witnessing an unprecedented demand for its latest generation of Blackwell AI graphics processing units.
Taiwan Semiconductor fabricates the Blackwell GPUs designed by Nvidia. It has been focused on aggressively increasing its AI chip production capacity to fill Nvidia's orders. Reports suggest that Nvidia has cornered more than 70% of TSMC's advanced chip packaging capacity to meet Blackwell demand. What's more, TSMC's advanced chip packaging module shipments are reportedly increasing by 20% every quarter, which is why the company is looking to add two more facilities to boost supply.
Nvidia is expecting its revenue to jump 65% in the current quarter, and it gets most of its revenue from selling AI data center chips. Throw in the supply chain improvements that TSMC is making, and it's easy to see why there's a good chance that its quarterly performance and guidance could crush Wall Street's expectations.
Meanwhile, other AI chip companies such as Broadcom and Marvell Technology have also called for outstanding growth in their sales. Broadcom and Marvell are benefiting big time from the rapidly growing demand for custom AI processors, which they design and TSMC manufactures. Similarly, another TSMC customer -- Advanced Micro Devices -- is witnessing an uptick in demand for central processing units that power personal computers (PCs), a market that's getting a boost thanks to generative AI.
The future seems bright for Taiwan Semiconductor, as it is in a solid position to make the most of the secular growth of the chip market thanks to AI.
The stock is too attractive to ignore right now
TSMC stock's recent pullback means that it can now be bought at under 25 times trailing earnings, while its forward earnings multiple of less than 19 points toward robust growth in the bottom line. These multiples are cheaper than the Nasdaq-100 index's price-to-earnings ratio of around 29 (using the index as a proxy for tech stocks).
Analysts are expecting a 29% increase in TSMC's earnings in 2025. Even better, analysts have been increasing their earnings growth expectations for the next couple of years.
TSM EPS Estimates for Current Fiscal Year data by YCharts.
However, there is a good chance that TSMC's growth could be better than analysts are expecting. The company is forecasting its revenue to increase at a compound annual growth rate (CAGR) of 20% for the next five years. That's why investors looking to add an AI stock that could deliver healthy long-term gains and that's trading at an attractive valuation right now can consider loading up on TSMC before it starts soaring.
