TSMC Q2 Earnings Preview: Can Price Hikes and Capex Plans Propel Shares Beyond $200?

Moomoo News Global wrote a column · 5 hours ago

The leading global foundry company, $Taiwan Semiconductor(TSM.US)$, is set to unveil its second-quarter earnings for 2024 before the market opens on July 18. Thanks to the sustained AI boom and favorable factors such as price hikes, TSMC has seen a cumulative surge of over 81% this year, significantly outperforming the Philadelphia Semiconductor Index's 38%. The company's market cap surpassed the $1 trillion mark in early July, and investors and analysts are eagerly anticipating more clues about TSMC's profit prospects, price hiking details, and capex plans from the upcoming earnings report and analyst meeting.

Earnings Preview

According to moomoo:

● Analysts estimate TSM to post a revenue of TWD 653.34 billion for 2024Q2, representing an impressive YoY growth of 36%.

● EPS is also projected to increase by 29% YoY, reaching TWD 45.83.

● TSM has already gained strong bullish sentiment from Wall Street analysts, with the highest target price reaching $250, indicating a potential upside of more than 30% from the latest closing price.

Leading Tech in Leading-Edge Nodes and Packaging: Price Hikes Key to Margin Growth

TSMC's leading technology position not only allows it to enjoy over 60% of the global foundry market revenue share but also provides it with strong pricing power, particularly in the leading-edge nodes (3nm/5nm) and advanced packaging (CoWoS) areas.

Due to supply shortages and cost pressures, TSMC has been signaling price increases since June, primarily for its advanced 3nm/5nm process and advanced packaging, with AI product prices expected to rise by 5% to 10% starting next year, while non-AI product prices will increase by 0% to 5%, and advanced packaging prices will rise by 15-20%. According to supply chain checks conducted by Macquarie Securities, most of TSMC's customers have agreed to the price hikes. A report by Morgan Stanley also noted that TSMC has signaled a shortage of advanced semiconductor capacity to its customers in the consumer electronics and high-performance computing sectors, ensuring that customers recognize TSMC's value and receive capacity allocations.

In addition, TSMC's sales data for the second quarter released last week showed that its sales revenue was NT$673.51 billion, a year-on-year increase of 40% and exceeding the market's expected NT$654.27 billion, and even higher than the top end of the guidance range by 1.6%. The strong sales performance reflects robust downstream demand and provides further support for price negotiations.

According to Bloomberg Intelligence:

"A key focus for the earnings call will be how much TSMC can negotiate price increases, backed by strong demand for its 3nm and CoWoS packaging."

The price hikes are expected to directly drive TSMC's gross margins to perform better than expected. Macquarie Securities has raised its gross margin forecast for 2024 to 52.6%. JP Morgan also believes that gross margin increases will be the main driver of TSMC's earnings per share upgrade in the next 12-18 months, and expects TSMC's 2Q gross margins to come in at 53%, at the higher end of the guidance range of 51-53%.

Looking ahead, with the yield ramp-up for 3nm, as well as price increases for 3nm, 5nm, and CoWoS, and the cyclical recovery of other process nodes, TSMC's gross margins are expected to continue to remain high. Macquarie Securities predicts gross margins of 55.1% and 59.3% for 2025 and 2026, respectively. JP Morgan's gross margin forecast for 2025 has also been raised to 55.8%, all of which are higher than the Wall Street consensus of around 54%.

Source: Bloomberg

Not Just AI, Smartphone/PC Demand Comeback Also Drives Growth

The robust expansion of AI has played a pivotal role in propelling the soaring demand for TSMC, and has solidified TSMC's position as a primary beneficiary of the ongoing AI trend. However, it is worth noting that AI is not the sole area where TSMC is experiencing growth. The introduction of AI functionality in the smartphone and personal computer markets is leading to an upgrade cycle that is poised to arrive. According to research by Deutsche Bank in early July, the combined impact of these two functions is more important for TSMC's sales growth than that of AI. Based on its data, Apple accounts for 25% of TSMC's sales revenue, exceeding that of $Advanced Micro Devices(AMD.US)$ (11%) and $NVIDIA(NVDA.US)$(8%).

Potential Increase in Capex Guidance May Influence Market Sentiment

Capital expenditures guidance is poised to become another area of focus for investors, particularly with regards to the outlook for 2025. JP Morgan anticipates that due to robust demand for 2nm technology, as well as ongoing investments in Japan and Arizona, and advanced packaging expansion, TSMC's capital expenditures will increase to $35-36 billion in 2025, and remain at around $30 billion in the upcoming years.

Bloomberg Intelligence further noted that TSMC could potentially increase its US capital expenditures if former President Trump were to be re-elected, following his attack recently:

"TSMC may need to boost US capex in the next five years due to rising local-production demands from US chip designers such as Apple and Nvidia, and to protect market share. Given chances for China tensions to rise and for Donald Trump to be reelected, the US may push harder for more domestic chipmaking especially in high-end devices."

Recent Developments in 2nm Is Another Key Point

According to Taiwanese media Commercial Times, TSMC's 2nm trial production is set to begin this week, which is much earlier than the anticipated timeframe of the fourth quarter of this year. These 2nm node chips are expected to be mass-produced by 2025 and supplied to TSMC's core customer, Apple, who may reserve all TSMC's 2nm capacity with their self-developed chips. Considering that Apple is TSMC's largest customer, the significant demand for 2nm chips from Apple is expected to drive TSMC's revenue substantially. Investors are eagerly anticipating more updates on the progress of 2nm technology during this week's earnings conference.

Drawing on historical performance, TipRanks data reveals that in the past 8 quarters since 2022, TSMC has beaten market expectations in 6 quarters, with its stock price rising on 6 out of 8 earnings release days. Year-to-date, TSMC has surged by 81.43%, ranking second only to NVIDIA among constituents of the Philadelphia Semiconductor Index.