Taiwan Semiconductor Manufacturing Co Ltd (TSM) ADS Each Representing 5 Shares

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TSMC’s first-quarter revenue rose 41.6%, ignoring currency moves, to $25.5bn - ahead of market forecasts. The uplift was supported by strong demand for high-performance computing, which increased its share of the mix from 46% to 59%.

Operating profit increased by 63.5% to $12.4bn, helped by operating expenses that grew at a slower pace than revenue.

The improved operating performance and lower capital expenditures in the first quarter left the free cash flow at $9.0bn.

TSMC reiterated its full-year guidance for revenue growth in the mid-twenties range and capital expenditure of $38-42bn.

Currency = US dollar.

The US listing was up 5.0% in pre-market trading.

Our view

TSMC has issued a reassuring set of first-quarter numbers. There had been concerns heading into the results that recent tariff drama could lead to a slowdown in demand, but management hasn’t seen any signs yet. That’s good news, but it will probably take a few months before the impact of tariffs becomes a little clearer.

The company is the world’s leading semiconductor foundry. It doesn’t design its own microchips but manufactures and assembles integrated circuits for clients such as NVIDIA, ARM, and Apple. Microchips are among the most complex devices known to man, and they’re getting ever more intricate.

TSMC’s dominance is underpinned by technology leadership and manufacturing excellence, leaving it well-placed to benefit from major technological shifts. That’s feeding through to impressive growth numbers. Despite what’s going on with global trade, we see a long pathway ahead for AI-related demand, and TSMC is broadening its product and service offerings for designers of systems that can process data, solve problems, and make decisions.

The rise of connected devices and data-heavy activities like drug discovery, blockchain, and self-driving cars is boosting demand for high-performance computing (HPC) parts. This supports TSMC’s forecast of long-term revenue growth close to 20%. HPC already makes up over half of TSMC’s revenue, and we believe room for significant growth.

TSMC is well ahead of the pack in terms of capabilities and efficiency. But there are some well-funded players chasing the same prize. That means it can’t stand still in this incredibly fast-moving industry, with progress driving a new generation of chip technology every couple of years.

TSMC’s expansion plans are well supported by a strong balance sheet and impressive cash flows, but they won’t go unnoticed by the market. Constant evolution can be a drag on profits, especially if demand for the most densely packed circuits fails to meet expectations.

The geopolitical environment is also a factor that needs close monitoring. Tension between Taiwan and China is an ever-present threat, but the immediate focus is on tariffs. We see TSMC’s efforts to diversify its operations beyond Taiwan as a step in the right direction. But the near-term outlook on both direct tariffs for Taiwan and the impact on global economies is unclear.

Short-term uncertainty means the valuation has fallen well below its long-run average. We see enough growth drivers from AI demand to support earnings and think the valuation for a high-quality name is now attractive. However, there are no guarantees, and volatility is almost certain over the next few quarters.

Environmental, social and governance (ESG) risk

The semiconductor sector is medium-risk in terms of ESG. Overall, this risk is managed adequately in Europe and North America but has considerable room for improvement in the Asia-Pacific region. Its reliance on highly-specialised workers means labour relations is one of the key risk drivers. Other risks worth monitoring include resource use, business ethics, product governance, and carbon emissions.

According to Sustainalytics, TSMC’s management of material ESG issues in strong.

TSMC has a company-wide target to reach net zero by 2050, and plans to use 40% renewable energy for all fab operation sites by 2030. Its latest products promise to deliver substantial energy efficiencies for end users. TSMC incorporates water scarcity and flooding into its enterprise risk management, but its water intensity is well above the industry median, suggesting there is room for improvement. Skill shortages are an industry-wide issue, but TSMC has a strong commitment to talent development and staff retention has been moving in the right direction.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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