Is Taiwan Semiconductor stock a buy? Key takeaways from strong Q2 and 2024 guidance

Taiwan Semiconductor Manufacturing Co. (NYSE: TSM) is making headlines with its robust second-quarter earnings and optimistic revenue guidance for the remainder of 2024.

This surge in performance, driven by heightened demand for artificial intelligence (AI) chips, marks a significant shift in the semiconductor landscape and raises the question: Is TSM stock a buy?

Q2 results

TSM reported a striking 32.8% increase in Q2 net revenue year-over-year, reaching $20.82 billion. This growth is underpinned by the company’s cutting-edge 3nm and 5nm technologies, which have seen soaring demand, particularly from sectors leveraging AI.

The financial leap was complemented by an earnings per ADS (EPADS) rise to $1.48 from the previous year’s $1.14, surpassing analysts’ expectations. TSM’s profitability was further boosted by a significant 36.3% growth in net income compared to the previous year.

Amid these financial achievements, TSM’s operational strategies reflect a robust business model. The company has committed to a narrowed capital expenditure range for 2024, planning to invest between $30 billion and $32 billion, primarily in advanced process technologies.

Geographically, TSM’s market reach is extensive, with significant revenue contributions from North America and China, despite geopolitical tensions that have stirred market volatility.

Impact of external factors

Recent comments by former U.S. President Trump questioning U.S. defense payments to Taiwan led to an 8% drop in TSM’s stock just before the company’s Q2 earnings release. However, the robust earnings report helped mitigate these losses, underscoring the market’s confidence in TSM’s financial health and strategic direction.

Analysts and management’s views

Most analysts remain bullish on TSM, with firms like Bernstein and Morgan Stanley recently adjusting their price targets upward in anticipation of continued growth, particularly in the AI segment.

Bernstein highlighted the company’s potential for margin improvement, driven by operational efficiencies and a favorable product mix, especially with the increasing adoption of 3nm technology.

TSM’s leadership is also optimistic. CEO C.C. Wei’s remarks during the earnings call reassured investors of TSM’s commitment to its strategic initiatives, including expansion plans in Arizona and potential new ventures in Europe.

This confidence is bolstered by the company’s raised revenue forecast for 2024, which now anticipates a mid-20% increase in U.S. dollar terms.

Valuation and market position

From a valuation perspective, TSM trades at a forward price-to-earnings (P/E) ratio of 26.75, reflecting its growth prospects as it continues to dominate the high-performance computing and smartphone segments.

The company’s forward-looking statements suggest sustained demand for its products, which largely justifies its current valuation.

While the company faces external pressures—from geopolitical risks to industry-wide supply chain challenges—its market position and financial strength offer a compelling case for potential investors.

Technical indicators and market sentiment

TSM’s stock has witnessed a strong rally since November last year, doubling in price. It made its all-time high at 4193.47 recently on July 11th, but retraced more than 10% from that level after including the recent 8% drop.

Two positive signs for the bulls currently stand out: despite the swift retracement, the stock did not fall below its previous swing low near $167, and it has bounced back after its Q2 results.

Investment strategy

Traders who are bearish on the stock must wait for it to give a daily closing below $167 before initiating any short positions as any minor pullback above that level will be seen as a buying opportunity by bullish investors.

Taiwan Semiconductor’s strong Q2 performance and optimistic 2024 guidance highlight its resilience and growth potential amidst a dynamic semiconductor industry.

With robust financials, strategic investments, and a favorable market position, TSM presents a compelling opportunity for investors looking to capitalize on the burgeoning AI chip market.

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