TSMC sales exceed expectations, boosting AI prospects in 2025

(Bloomberg) — Taiwan Semiconductor Manufacturing Co.’s quarterly sales beat estimates, reinforcing investor expectations that spending on artificial intelligence hardware will continue strong into 2025.

Nvidia Corp and Apple Inc’s preferred chipmaker reported a 39% rise in revenue from October to December to NT$868.5 billion ($26.3 billion), according to calculations disclosed monthly. This compares to an average estimate of NT$854.7 billion.

The strong performance from Taiwan’s largest company heightened expectations that big tech companies from Alphabet Inc. to Microsoft Corp. will continue to rapidly build and upgrade data centers to promote the development of artificial intelligence. This month, AI server maker Hon Hai Precision Industry Co. reported better-than-expected sales, while Microsoft outlined plans to spend $80 billion on data centers this fiscal year.

TSMC’s growth accelerated in December, with revenue growth capped at 34% in 2024. This contrasts with TSMC’s official annual growth target of 30%, although this outlook is in U.S. dollar terms. The world’s largest maker of advanced chips is one of the biggest beneficiaries of the global race to develop artificial intelligence.

TSMC’s market capitalization will almost double in 2024, and it is currently trading at a valuation of nearly $1.1 trillion in the United States. However, some investors worry about when the AI ​​craze will wane. Although TSMC’s revenue beat expectations, it was only 1.6% higher than the average forecast and fell short of the most optimistic analysts’ expectations.

More pessimistic market observers point to potential overbuilding, development bottlenecks such as power shortages, and the continued lack of a killer AI application or service that would use up all server capacity. Investors will want to know TSMC’s outlook for the industry when it releases its full earnings report on Jan. 16.

In addition to Nvidia and the artificial intelligence space, the Taiwanese company will also have to deal with the growing technology market and geopolitical uncertainty in 2025. As the main producer of iPhone chips, TSMC remains dependent on Apple’s business. The US company is working to stimulate demand for its flagship product in 2025, although many users hope that the gradual addition of artificial intelligence features will drive the next iteration of the device.

What does Bloomberg say?

The company’s gross margin could expand to a two-year high of 58% or higher. There are four aspects worth paying attention to in the upcoming earnings call: First, the prospects for CoWoS advanced packaging capacity construction and revenue, which may help provide insight into the expected strength of artificial intelligence chip demand in the next 12-18 months. Secondly, progress has been made in the capacity expansion of the Arizona wafer fab in the United States, which is crucial to meeting the local chip manufacturing needs of companies such as Apple and Nvidia. Third, there is potential profit pressure brought about by weak demand for 7, 16nm and larger mature nodes.

Finally, there is the capex plan for 2025, which will indicate TSMC’s confidence in the adoption of its next-generation N2 node.

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The United States has also established a series of restrictions to limit the flow of Nvidia’s most powerful chips to China, with uncertain long-term effects on TSMC’s main customer.

Morgan Stanley expects TSMC’s annual sales growth to be around 20% in U.S. dollar terms. “TSMC typically starts the year with conservative guidance and then over-delivers,” analyst Charlie Chan wrote. The company raised its growth outlook for 2024 and may take a more conservative stance again at the start of the new year.

In the long term, TSMC is pursuing rapid international expansion. Capital spending is expected to increase in 2025 from about $30 billion last year. A senior Taiwanese official said the company plans to set up more factories in Europe, focusing on the artificial intelligence chip market. That doesn’t include construction underway in Japan, Arizona and Germany.

(The third paragraph updates TSMC’s full-year results)

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