Despite the market's broad worries about the possibility that artificial intelligence (AI) companies have been overspending on infrastructure, AI companies have been delivering solid results.
One of the best indications of how it's going in that market is Taiwan Semiconductor's (TSM +5.29%) performance. The company fabricates the AI chips that its clients design and that drive AI development, and its growth portends how AI is developing and what to expect from its many hyperscaler clients.
In the wake of its phenomenal first-quarter report last week, the company's market cap rose past Meta Platforms and (briefly) past Broadcom, which hit its own new highs last week. As of this writing, Taiwan Semi is the seventh most-valuable company in the world, and it still has massive long-term opportunities. Here's why TSMC is still an outstanding buy.
Image source: Taiwan Semiconductor.
"Insatiable demand"
By all accounts, Taiwan Semi had an excellent Q1. These were some of the highlights:
- Revenue increased 40.6% year over year, beating guidance.
- Gross margin was 66.2%, beating guidance.
- Operating margin was 58.1%, beating guidance.
Sales in its high-performance computing segment, where its AI chip business is, increased 20% quarter over quarter and accounted for 61% of total revenues.
CEO C.C. Wei said there was "insatiable need for high-performance and energy-efficient computing," and the company is investing in its capacity and technology to meet the demand.
Management is guiding for further incredible results in the second quarter:
- Revenue to increase 32% year over year.
- Gross margin of 65.5% to 67.5%, up from 62.3% last year.
- Operating margin of 56.5% to 58.5%, up from 54% last year.
NYSE: TSM
Key Data Points
Investing for success
Taiwan Semiconductor works with all the top names in AI chips and semiconductors across industries, and management was clear that it was not prioritizing any specific clients. Instead, it's building out its production capacity so that it can meet demand, including expanding its new facilities in Arizona. As of now, it's developing its newest technology in Taiwan, where it has its research and development facilities set up. But it's looking to build out capacity in locations around the globe to produce all kinds of chips.
Management had already updated shareholders that it plans to ramp up development to meet soaring demand. It provided some more color about how that's going to impact the company's financials in the short term. Starting in the back half of the year, it's expecting gross margin dilution of 2% or 3% from its overseas expansion, which will eventually become 3% or 4%, and it's expecting 2% or 3% margin dilution for 2026 from the ramp-up of its 2-nanometer (nm) technology.
However, as Wei noted on the earnings call: "A higher level of capital expenditures is always correlated with higher growth opportunities in the following years," which is why the market is taking this potentially negative short-term scenario in stride. There's so much growth to expect, and investors can still buy in today.
