TSMC Profit Surges 58%, Defying Seasonal Slump; Is Middle East Conflict the Real Trigger for the 3% Dip After Q1 Earnings?

According to the data disclosed in the earnings report, TSMC's gross margin this quarter was 66.2%, exceeding the previous guidance range of 63%-65%. This was primarily driven by the dual impact of higher average selling prices and lower unit costs.

Regarding pricing, as early as last September, TSMC announced a four-year price hike plan for advanced nodes below 5nm starting in January 2026, with increases ranging from 5% to 10%. On the cost side, as shipment volumes increased, fixed costs decreased due to economies of scale, thereby boosting unit gross profit.

Furthermore, the gross margin improvement this quarter was also influenced by changes in the profit mix. Typically, Q1 is TSMC's weakest quarter because its largest customer for the most expensive 3nm process, Apple, (AAPL) has finished its peak shipment period in the fourth quarter and entered a seasonal lull, leading to a significant drop in demand.

However, TSMC delivered a strong counter-seasonal performance this year, with an increase in average selling prices. This was because while revenue from the smartphone platform decreased by 11%, revenue from the HPC (High-Performance Computing) platform rose 20% year-over-year, accounting for a staggering 61% of total revenue. Currently, HPC demand is migrating from 5nm to the more expensive 3nm, driving up TSMC's margins in this segment.

The company raised its gross margin guidance for the next quarter to 65.5%-67.5%, also primarily due to the migration of HPC chip demand toward the 3nm node.

Earlier this month, chip giants Samsung and SK Hynix both stated that their helium inventories remain sufficient with high recovery rates and that they have successfully diversified supply channels to effectively buffer supply chain risks. However, this impact may be underestimated.

Although TSMC CFO Wendell Huang noted that the company expects the Middle East conflict will not affect its supply of critical chipmaking materials like helium in the short term, TSMC also warned that a spike in these raw material prices could pressure the company’s profitability and the global economy. Rising costs for components, including memory chips, could impact price-sensitive consumer markets, though it is currently premature to quantify that impact.

Compared to TSMC, Bloomberg's outlook is more optimistic, noting that TSMC's gross margin guidance for the second quarter remains higher than the record set in the first quarter, suggesting that even if regional instability leads to higher costs for chemical raw materials and natural gas, it will not be enough to hinder the company's structural margin adjustments. TSMC's Q2 gross margin guidance range is 65.5%-67.5%, with the upper end exceeding the 66.2% record reached this quarter.

Beyond the impact of the Middle East conflict on raw material supply, TSMC faces further challenges from competitors. In addition to TSMC, Intel (INTC) and Samsung are both betting on the 2nm advanced process race. Although TSMC's yield rates remain far ahead for now, these companies have leveraged pricing advantages to secure certain orders. For instance, last July, Samsung secured an order from Tesla (TSLA) worth $16.4 billion to produce Tesla's AI6 chips using the 2nm process.

Currently, other giants are also building their own chip plants to reduce costs. Tesla CEO Elon Musk announced in March the joint launch of Terafab, a 2nm wafer fab in Texas, in collaboration with SpaceX, followed by Intel’s announcement that it would join the project.

In March this year, the Groq LPU chip manufactured by Samsung debuted at Nvidia's (NVDA) GTC conference, signaling that it has broken into Nvidia's foundry segment and become a rival to TSMC for Nvidia's orders.

Overall, TSMC's latest results met market expectations but did not significantly exceed them. For instance, the company raised its full-year 2026 revenue growth guidance to "above 30%" from its previous guidance of "around 30%," thereby increasing the certainty of its growth projections. However, because market expectations for TSMC's growth already exceeded 30%, this revision failed to provide any surprise upside.

Furthermore, after the pre-announcement of better-than-expected first-quarter revenue on April 10, TSMC's ADRs rose by more than 3% intraday, suggesting that investors had already priced in part of the positive news. This provided sufficient reason for investors to react with concern rather than optimism once the actual earnings were released.

However, given that TSMC's management has consistently maintained a "relatively cautious" style in its guidance, combined with the company's predictable high gross margins for the full year, the post-earnings share price decline may be an "unwarranted sell-off," and the market can still maintain ample optimism regarding its future prospects.

This content was translated using AI and reviewed for clarity. It is for informational purposes only.