Story Stocks^®

Taiwan Semi (TSM -3%) records a solid beat-and-raise in Q2, prompting an initial buy-the-dip mindset today following the stock's sell-off yesterday on further export restriction concerns. The world's largest semiconductor foundry, supplying chips for many prominent tech giants, including NVIDIA (NVDA) and Apple (AAPL), climbed to all-time highs last week before encountering some turbulence. Still, even after yesterday's sell-the-news reaction, shares were up roughly +35% since Q1 results in mid-April, reflecting exuberance over AI and a recovery year ahead.

Against this backdrop, expectations remained relatively high. With concerns over export restrictions to China still lingering, the combination of these two dynamics led to investors quickly fading TSM's initial pop out of the gate, pulling back from highs of +2%. Also lurking in the shadows are fears over China/Taiwan relations. If tensions worsen between the two nations, TSM could get caught in the crosshairs.

• Like clockwork, TSM beat analyst earnings and sales estimates in Q2, delivering a 34.6% jump in its to-line yr/yr and 10.3% sequentially to $20.82 bln. Margins did slip by 90 bps yr/yr but stayed virtually unchanged from Q1. Sequentially, high-performance computing (HPC) shined, leaping by 28%, underpinning an insatiable desire for AI.
• AI remains the bedrock of TSM's excitement over the short and long run. Management anticipates its business over the next quarter to be supported by solid smartphone and AI-related demand. Even though TSM kept its FY24 forecast for the overall semiconductor market, excluding memory, unchanged at +10%, it did raise its FY24 revenue outlook to $22.4-23.2 bln from $19.6-20.4 bln. Again, this underpins the high forecasted demand from AI-related businesses. TSM added that in just the past three months, it has observed even greater AI demand from its customers.
  • Given these remarks, it would not be surprising if NVDA delivers another outstanding quarter next month. While TSM's post-quarterly responses have not had much correlation with reaction to NVDA's earnings, its AI comments still serve as good news for the state of AI, as GPU makers would not likely continue ordering more chips if their end demand was not robust.
• Further evidence that AI demand has gone nowhere was TSM's FY24 capital budget forecast -- the higher the level, the higher the growth opportunities. TSM kept the high end of its FY24 outlook unchanged at $32 bln but did increase the low end from $28 bln to $30 bln. Most of the budget will be allocated to advanced process technologies, many of which HPC products are based on.

Perhaps unsurprisingly, the tailwinds produced by AI remained alive and well in Q2, and TSM sees this remaining the case this year. However, the gains associated with AI are being dwarfed by geopolitical concerns. The Biden Administration announced yesterday that it was considering more restrictive export controls, possibly halting semiconductor equipment suppliers from providing China access to American technology. Meanwhile, Taiwan may not be guaranteed intervention by the U.S. amid an invasion by China. Until these alarm bells quiet down, TSM could continue enduring selling pressure.