TSMC Sees Strong Growth Driven by AI Demand

TSMC(TSM)  reported Q2 revenue of NT$933.8 billion, up 38.6% YoY and 11.3% QoQ, exceeding the forecast of NT$928.5 billion. Net profit reached NT$398.8 billion, a 60.7% YoY increase and 10.2% QoQ growth, surpassing expectations of NT$378.1 billion. EPS came in at NT$76.8, above the NT$72.77 forecast. CFO Wendell Huang attributed the strong results to AI and high-performance computing (HPC) demand.

Q2 Earnings Beat Expectations

Advanced processes (7nm and below) accounted for 74% of Q2 revenue, up from 73% in Q1 and 67% in Q2 2024. Revenue from the 3nm process rose to 24% of sales, with customers increasingly adopting advanced technologies. HPC contributed 60% of revenue, growing 14% QoQ, while smartphone revenue rose 7% QoQ.

Upgraded Full-Year Growth Forecast

TSMC raised its full-year USD revenue growth forecast to 30%, up from 25%, exceeding the market expectation of 27%-29%. For Q3 2025, revenue is projected at $31.8–$33 billion, a 35%-40% YoY increase, with gross margins expected at 55.5%-57.5% and operating margins at 45.5%-47.5%.

Currency fluctuations remain a concern, as most revenue is USD-denominated but 75% of costs are in NT$. A 1% NT$ appreciation could reduce gross margins by 0.4 percentage points. However, currency effects are less impactful than rising overseas labor costs, which are estimated to cut gross margins by 2%-3% annually starting in 2025.

Overseas Expansion and Production Updates

TSMC’s Arizona facility has completed construction of its second plant, set to produce 3nm chips, with mass production accelerating. A third Arizona fab will produce 2nm chips and A16 technology. In Japan, the first specialty technology plant in Kumamoto began mass production in late 2024, with a second plant planned for later this year. Despite strong demand, TSMC is maintaining its 2025 capital expenditure at $38–42 billion.

Demand Boost from Loosened China Export Restrictions

With robust U.S. data center demand, TSMC’s outlook remains strong. By 2026, autonomous driving and robotics are expected to create significant chip demand, with one long-term client predicting robotics could surpass EVs by 10 times.

Cloud service providers are investing heavily in data centers, driven by AI. For instance, Oracle recently secured a $30 billion annual cloud contract from OpenAI, leasing 4.5 GW of computing capacity. The growing adoption of stablecoins and tokenization is also expected to increase demand for semiconductors.

In the short term, Nvidia's approval to sell H20 chips to China could benefit TSMC, as China experiences rapid AI hardware growth. Though Huawei has competing products, emerging AI technologies like DeepSeek are driving demand.

Competitive Position

TSMC has little concern over demand or competition. Its planned fabs are coming online as scheduled, while Intel’s (INTC) foundry business remains stagnant despite new leadership.

TSMC’s 2025 and 2026 PE ratios are projected at 24x and 21x, respectively. Bloomberg’s consensus 12-month target price is $231.28. Strategy: Buy and hold around $235.

By Tim Chen, MoneyClub financial writer

Having over 10 years of investment analysis experience and serving as a financial columnist.