Why Taiwan Semiconductor Stock Popped Today

Key Points

• Taiwan Semiconductor Manufacturing beat earnings soundly this morning.

• Sales surged, and profit margins were robust.

• TSMC did warn that sales will slow a bit in Q3, and profit margins may slip.

• 10 stocks we like better than Taiwan Semiconductor Manufacturing ›

Shares of Taiwan Semiconductor Manufacturing (NYSE: TSM), that powerhouse of contract semiconductor manufacturing located just off the coast of mainland China, reported powerful Q2 earnings this morning, which sent its shares up 3.3% through 11:40 a.m. ET.

Expected to be $2.28 per American depositary receipt for the quarter, TSMC reported instead $2.47 per ADR, beating the forecast soundly. Sales for the quarter were reported as NT$933.8 billion, which worked out to $30.1 billion.

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TSMC Q2 earnings

Q2 sales climbed 38.6% year over year (but 44.4% in USD terms), and net profits grew significantly faster, up 60.7%. The company noted that its gross profit margin for the quarter was 58.6%, operating margin was 49.6%, and net margin was 42.7%.

Company CFO Wendell Huang credited "continued robust AI and [high-performance computing]-related demand" for the sales growth, and noted that 74% of the company's revenue came from the sales of advanced semiconductor wafers -- chips at 7 nanometers or less.

Is TSMC stock a buy?

Turning to guidance, TSMC forecast that in Q3, it will book between $31.8 billion and $33 billion in revenue, with gross margins ranging from 55.5% to 57.5% and operating margins between 45.5% and 47.5%.

While investors seem fine with those numbers (they're buying, not selling, after all), that's not necessarily great news. TSMC did $23.9 billion in Q3 revenue last year, so even $33 billion in sales would work out to "only" 38% year-over-year growth -- somewhat slower than in Q2 even at the top of guidance. Meanwhile, the forecast for both gross and operating margins foreshadows a sequential decline in profitability.

Still, at a P/E ratio of only 22.5 and with sales still growing briskly, it's hard to call TSMC stock anything but a "buy."

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.