Shares of Taiwan Semiconductor Manufacturing (TSM +0.57%) jumped after the semiconductor contract manufacturer reported strong Q2 results and issued an upbeat outlook. The stock is now up nearly 25% on the year.
The company continues to be an artificial intelligence (AI) infrastructure winner, as it is the world's leading maker of advanced chips for companies like Nvidia and Apple.
Let's take a closer look at TSMC's results to see if the stock has more upside, or whether it's too late to buy the stock.
NYSE: TSM
Key Data Points
No slowdown in sight
With rivals Intel and Samsung struggling, TSMC has established itself as an invaluable part of the semiconductor value chain due to its scale and technological expertise. The company is the clear leader in manufacturing advanced chips, and more and more of its revenue is coming from its leading-edge nodes. Nodes are a reference to the size of how many transistors can be fit on a chip, and the smaller the node, the greater the processing power and efficiency a chip can have.
In Q2, nodes 7 nanometers (nm) and under accounted for 74% of its revenue, up from 67% a year ago. Its newest 3-nm technology made up 24% of total wafer revenue, jumping from just 15% a year ago.
AI chips were once again the biggest driver of TSMC's revenue growth, with high-performance computing (HPC) accounting for 60% of its revenue in the quarter. HPC revenue climbed 14% sequentially. A year ago, the segment accounted for 52% of the company's revenue.
This helped drive a 44% increase in the company's revenue to $30.1 billion. Its earnings per American depositary receipt (ADR) soared 67% to $2.47 from $1.48 a year ago, while its EPS in local currency climbed 61%.
TSMC once again saw strong year-over-year gross margin expansion; however, it is expecting to see pressure in the future. Gross margin increased 540 basis points year over year to 58.6%, despite the company seeing a currency headwind and dilution from the start-up of its new fab in Arizona. It expects gross margin to fall to 56.5% in Q3 due to currency and the further ramp-up of its new facilities in the U.S. and Japan. It also expects its non-Taiwanese fabs to negatively impact its gross margins by around 2% to 3% a year and then widen to 3% to 4% a year in the later stages of its build-out.
Looking ahead, TSMC forecast Q3 revenue to come in between $31.8 billion and $33 billion, representing about 38% year-over-year growth at the midpoint. It projected its operating margin to range from 45.5% to 47.5%.
TSMC raised its full-year revenue forecast, with it now projecting 30% growth, up from prior guidance of "close to the mid-20% range." The company pointed to accelerating AI demand as a key driver, noting that data center orders have strengthened meaningfully even compared to just three months ago. It also cited growing momentum from sovereign AI projects. That's translating into strong demand for its leading-edge 3-nm and 5-nm chip technologies.
TSMC said it hasn't seen any change in customer behavior due to tariffs, but noted that the risk remains. The company is currently in the middle of investing $165 billion in advanced semiconductor manufacturing in the U.S. The construction of its second fab in Arizona is already complete, and its first fab is already in high-volume production. It has plans to build six fabs, two advanced packaging facilities, and create an R&D center.
Image source: Getty Images.
Is it too late to buy TSMC stock?
While tariff and trade policy concerns regarding semiconductors remain, the simple fact of the matter is that no other foundry in the world has the scale and technological expertise of TSMC. As such, it will continue to manufacture the majority of advanced chips and is one of the best-positioned companies to continue to benefit from the ongoing AI infrastructure build-out.
While the company is expecting to see some gross margin pressure due to its overseas expansion, it has also seen strong pricing power, so it could have the ability to surprise to the upside in the coming years in this regard. TSMC also should benefit from the recent change of heart by the U.S. to allow Nvidia and Advanced Micro Devices to sell certain chips into China.
Meanwhile, TSMC's stock remains attractively valued, trading at a forward price-to-earnings (P/E) ratio of 26 times based on analysts' 2025 estimates and price/earnings-to-growth ratio (PEG) of around 0.7. Stocks with PEG ratios below 1 are typically considered undervalued.
Taken altogether, I think TSMC continues to be positioned as a long-term winner, and that it's not too late to buy the stock.
