Story Stocks^®

Taiwan Semi (TSM) has cooled down from initial highs of over +3% but still trades in the green today, following top and bottom-line upside in Q1 alongside upbeat Q2 revenue guidance. The chip-making behemoth, supplying tech titans like Apple (AAPL) and NVIDIA (NVDA), also reiterated its FY25 capital budget of $38-42 bln, signaling steady demand despite the overabundance of uncertainty injected into the global economy following a fluid trade policy from the Trump administration.

Recall that President Trump released a chart of reciprocal tariffs earlier this month, including a 32% rate on Taiwan. While the rate has been adjusted to 10% due to a 90-day pause, the rate will spike back to 32% without further negotiations. Furthermore, earlier this week, NVDA announced it would write down its inventory by $5.5 bln due to license restrictions on its chips geared for China, creating angst over future revenue tied to the region from TSM's customers.

However, despite all this, TSM is confident in hitting its prior capital budget for the year and reaching close to mid-20s percent revenue growth. Meanwhile, for Q2, TSM anticipates revs of $28.4-29.2 bln, well above analyst expectations.

• TSM's Q1 results were solid, registering EPS of $2.12 on revs of $25.53 bln, a 35.3% gain yr/yr. Gross margins did contract slightly, slipping by 20 bps, primarily due to the earthquake in January, which clipped 60 bps off margins. However, TSM's investments in fabrication plants outside of Taiwan are also creating some margin dilution.
  • TSM announced a $100 bln investment in the U.S. last month, initially expecting it to weigh on margins by 2-3%, but is starting to widen slightly to 3-4%. However, TSM mentioned that this is mostly the result of inflationary costs and potential tariff-related impacts.
• Tariffs remain a variable. Management touched on the potential impact of tariff policies but added that it has yet to see any change in customers' behavior, which provided its confidence in reiterating its FY25 revenue outlook. TSM noted that a better picture might appear over the next few months and will remain focused on its business fundamentals while continuing to capitalize on several demand tailwinds.
• AI is one such tailwind. TSM continues to observe exceptional AI-related demand thus far in 2025. TSM reaffirmed its revenue from AI accelerators, defined as AI GPUs, AI ASICs, and high-bandwidth memory (HBM) controllers for AI training, to double yr/yr in 2025.

The unmovable AI tailwind can support TSM's ability to recoup its roughly 20% sell-off YTD. However, many headwinds could prevent a quick recovery. The increased margin dilution is deflating. Meanwhile, trade policies make near-term demand conditions murky. Although TSM issued energetic guidance for Q2 and the year, the fluidity of the current administration's tariff stance creates outsized anxiety, reducing investors' confidence in TSM achieving its forecasts for the upcoming quarter and FY25. As such, shares are struggling to maintain their gains out of the gate today, potentially foreshadowing how the stock may move over the next few months.