TSMC’s Share Price is Riding High on Blowout Quarter

Taiwanese semiconductor giant Taiwan Semiconductor Manufacturing Co Ltd (TWSE: 2330) (NYSE: TSM) is a veritable computing chip giant.

Also known as TSMC, the company is a semiconductor “foundry”. That means it produces silicon wafer chips for some of the largest semiconductor design firms in the world.

I’ve written previously on how it’s tapping into larger structural growth trends such as 5G and artificial intelligence (AI).

Last week, TSMC reported its first-quarter earnings for the three months ended 31 March 2020. The numbers easily beat analysts’ consensus projections.

Here’s what investors should know about why it crushed earnings expectations and why its share price has been gaining.

Solid performance

TSMC nearly doubled its net income in the first quarter to post a healthy NT$116.99 billion (US$3.9 billion) in net profit. This easily beat analyst expectations of around NT$109 billion in net profit.

Its gross margin also expanded, rising from 50.2% in the last quarter of 2019 to 51.8% in Q1 2020. TSMC’s operating margin also saw a healthy jump – up to 41.4% in the first quarter of 2020 compared to 39.2% in Q4 2019.

All the metrics pointed to a solid quarter but of course, this latest quarter only captured first-quarter numbers. How the second quarter fares is up for debate but investors can take comfort from management’s guidance.

Management guiding positively

Even though the firm racked up around US$10.3 billion in revenues in the first quarter of 2020, TSMC management was still guiding for revenues to be as robust in the second quarter.

It said it expected the firm to post revenues of US$10.1-10.4 billion for Q2 2020. That’s expected to be around 30% year-on-year revenue growth.

What’s more, the company’s level of capital expenditure (capex) isn’t expected to slow down.

Looking to consolidate its market-leading position in the chip space, TSMC plans to maintain its target of spending a whopping US$15-16 billion in capex in 2020. That’s up from US$14.9 billion in 2019.

Smartphones will be key

Given TSMC’s links to the smartphone supply chain, the demand for new smartphones (and iPhones in particular) will be a crucial bellwether for the firm.

China saw a 19% jump in iPhone shipments in March, suggesting the country’s smartphone market is returning to its previous buoyant growth.

A big winner over the long term

TSMC investors will no doubt take comfort from its latest set of earnings. Although the company faces short-term headwinds from demand doubts, the firm is well-positioned to benefit from structural long-term growth in key areas.

Its shares jumped 7% in Taiwan trading after results were released while its US-listed ADRs traded at a March low of just under US$44 but now sit at US$52.59. That’s a rebound of over 20% in around a month.

For investors looking for a strong long-term business amid the coronavirus, TSMC seems to fit the bill.