TSMC recently released its December monthly revenue, which grew by a robust 57.8% YoY and 0.8% MoM to NT$278.16 billion. The fourth quarter revenue grew 38.8% YoY to NT$868.5 billion, beating the LSEG estimates of NT$854.7 billion.
In US dollar terms, Q4 revenue grew 36.9% YoY to $26.85 billion using the average exchange rate of $1=NT$32.34. We will get the official USD figures when the company releases its full results on January 16th. This suggests that the company’s revenue will come at the high-end guidance of $26.1 billion to $26.9 billion and beat the mid-point guide of $26.5 billion.
The strong December quarter revenue suggests that AI demand will continue in 2025. Recently, Foxconn also beat estimates with record fourth-quarter revenue driven by AI demand. Revenue grew by 15.2% YoY to NT$2.13 trillion, beating estimates of NT$2.1 trillion. Foxconn management said, “Robust AI server demand led to strong revenue growth for its cloud and networking products division.”
The revenue beat of TSMC and Foxconn provides further hope to investors that AI demand is not slowing down in 2025. TSMC is a major beneficiary of surging demand for AI chips, holding over 90% market share in manufacturing advanced AI processors. Increased investments from Big Tech is further expected to drive AI growth; for example, Microsoft recently announced plans to invest approximately $80 billion in AI-enabled data centers in FY2025, a significant increase from the $55.7 billion capex in FY2024.
Investors will be closely watching the comments from the management on the broader semiconductor market for 2025 since TSMC has better insights than any other company as the world’s leading foundry.
Revenue
Strong revenue growth is expected in the coming quarters due to robust demand for AI and smartphone chips. Over the past few quarters, revenue estimates have risen — 4.9 percentage points for Q4 2024 and 6.1 percentage points for Q1 2025 — indicating analysts’ confidence in the company’s ability to maintain growth.
- Management’s guide for the fourth quarter is between $26.1 billion to $26.9 billion, representing YoY growth of 35.1% and 12.8% QoQ at the midpoint. Based on the monthly TWD figures, Q4 revenue grew 36.9% YoY to $26.85 billion using the average exchange rate of $1=NT32.34. We will get the official USD figures when the company releases its full results on January 16th.
- Q3 revenue grew 36% YoY and 12.9% QoQ to $23.5 billion, driven by strong demand for AI and smartphone chips.
C.C. Wei, Vice Chairman and CEO, said in the earnings call, “Moving into fourth quarter, we expect our business to continue to be supported by strong demand for our leading-edge process technologies. We continue to observe extremely robust AI-related demand from our customers throughout the second half of 2024, leading to increasing overall capacity utilization rate for our leading-edge 3-nanometer and 5-nanometer process technologies.”
Due to its technological leadership, TSMC can capture robust demand for the most advanced AI chips. The revenue contribution from server AI processors is expected to triple this year and will account for a mid-teens percentage of 2024 revenue. Management guided for full year 2024 revenue to grow close to 30% in U.S. dollar terms and calculating using the recent monthly figures suggest revenue to grow 29.9% YoY to $90 billion, rebounding significantly from a decline of (-8.7%) for 2023.
Morgan Stanley expects TSMC to provide a conservative annual sales growth guide of low 20% in dollar terms for 2025 at the beginning of the year, with a potential to raise throughout the year as the company did in 2024.
Margins
While many companies face the issue of rising costs, TSMC has demonstrated resilience by effectively managing expenses. Through a combination of cost control measures, negotiating better prices with its customers, and leveraging economies of scale, TSMC has maintained strong profitability. The company's leadership position in the foundry industry further solidifies its competitive advantage.
According to an Economic Daily News report, TSMC plans to increase prices for advanced nodes by 5% to 10% in 2025. The price increase to customers will help to allay investor fears on rising costs from shifting of manufacturing processes outside of Taiwan due to geopolitical risks, increasing electricity prices in Taiwan, inflationary cost pressures, and initial higher costs involved in the ramp-up phase of advanced node manufacturing.
- Management guided Q4 gross margin to increase 20 basis points sequentially to 58% at the midpoint, up significantly from 53% in the same period last year, driven by higher capacity utilization and cost controls, partially offset by dilution from N3 ramp, higher electricity prices in Taiwan, and N5 to N3 tool conversion cost.
- Operating margins are expanding, helped by operating leverage. Management’s guide for Q4 is 47.5% at the midpoint compared to 41.6% in the same period last year.
- Q3 net income grew by 52.4% YoY to $10.06 billion or 42.8% of revenue compared to 38.6% in the same period last year.
EPS
Q3 EPS grew by 50.4% YoY to $1.94, driven by better capacity utilization, cost improvement, and operating leverage. EPS is projected to rise significantly in the coming quarters and analysts have raised estimates indicating greater confidence in the company’s ability to grow its bottom line.
- Analysts expect Q4 EPS to grow 54.9% YoY to $2.23, up from 35.4% expected growth in mid-October, and Q1 EPS to grow 49.5% YoY to $2.06, up from 26.1% expected growth in mid-October.
- Looking further out, analysts expect 2025 EPS to grow 32.1% YoY to $9.27 and 16.1% YoY to $10.76 in 2026.
Cash Flows and Balance Sheet
The company’s financial stability is evident due to its strong cash flows, with operating cash flows increasing 30.3% and free cash flows by 166% in Q3. The foundry industry is capital-intensive, and this is why you will notice a wide difference between operating cash flows and free cash flows for the company.
- Q3 operating cash flow was $12.13 billion or 51.6% of revenue compared to $9.31 billion or 54% of revenue in the same period last year.
- Free cash flow grew by 166% YoY to $5.72 billion or 24.4% of revenue compared to 12% of revenue in the same period last year. Capex was down (-9.9%) YoY to $6.4 billion.
- Management expects capex to be slightly higher than $30 billion for 2024, revised down slightly from the previous guide of $30 billion to $32 billion. About 70% to 80% will be allocated for advanced process technologies, 10% to 20% for specialty technologies, and 10% for advanced packaging, testing, mask making, and others.
- As the company continues to invest due to the strong expected AI growth, capex is likely to increase in 2025, and management mentioned that they will provide more details during the January earnings call.
- Cash and marketable securities were $68.5 billion and debt of $30.6 billion, compared to $63.05 billion and $30.4 billion in Q2.
Revenue by Platform
As the leading foundry for AI accelerators, TSMC is riding the enormous wave of demand from Big Tech. The chipmaker’s high-performance computing (HPC) revenues rose 11% QoQ to $11.99 billion in Q3 and accounted for 51% of revenue, surpassing the 50% mark for the second time.
TSMC is immensely benefiting from the AI spending of Big Tech companies. The company has more than 90% market share in manufacturing advanced AI chips. Microsoft also recently outlined its plan to invest about $80 billion primarily in AI-enabled data centers in FY2025, up from $55.7 billion capex in FY2024. This substantial investment underscores the growing importance of AI and bodes well for TSMC's continued dominance in the advanced semiconductor manufacturing sector.
As seen in the chart below, HPC revenue has grown sequentially each quarter in 2024 to reach a record $11.99 billion in Q3.
Smartphone grew by 16% sequentially and accounted for 34% of revenue from 33% of revenue in Q2.
Internet of Things revenue grew by 35% sequentially and accounted for 7% of revenue.
Automotive revenue grew by 6% sequentially and accounted for 5% of revenue. Digital Consumer Electronics decreased by 19% and accounted for 1% of revenue; others grew by 8% to account for 2% of revenue.
Revenue by Technology
The most advanced node in production today is the 3-nanometer process technology. Volume production for 2-nanometer is expected in 2025 and should have a meaningful revenue contribution in the first half of 2026.
According to the MoneyDJ report, TSMC has initiated the setup of a pilot production line for its 2-nanometer process at its Hsinchu Baoshan fab in Taiwan, with an initial monthly capacity of 3,000 to 3,500 wafers. By the end of 2025, TSMC expects to significantly expand its 2nm production capacity to over 50,000 wafers per month, including the contributions from its Kaohsiung fab in Taiwan. By the end of 2026, TSMC is expected to further increase its 2nm monthly capacity to 120,000 to 130,000 wafers, suggesting strong demand for the 2nm chips. TSMC's 2nm node is expected to provide 15% better performance and 35% better energy efficiency than its 3nm node. Apple is expected to be the first customer to use 2-nanometer process technology.
Advanced nodes are defined as 7-nanometer and below. These nodes accounted for 69% of wafer revenue in Q3 compared to 67% in Q2.
- In Q3 2024, 3-nanometer process technology contributed 20% of wafer revenue, while 5-nanometer and 7-nanometer accounted for 32% and 17%, respectively.
Other Points to Watch
Advanced Packaging
Advanced packaging demand is strong and will account for high single-digit revenue this year. According to Economic Daily News, TSMC’s monthly CoWoS capacity could reach 75,000 wafers in 2025, nearly doubling 2024 levels. Due to the strong demand, primarily from Nvidia, the construction of CoWoS facilities time has been shortened to 1.5 years from the previous three to five years.
Overseas Fabs
The company is expanding its fabs overseas to reduce geopolitical risks. TSMC began producing 4-nanometer chips in Arizona fab, United States Secretary of Commerce Gina Raimondo told Reuters. Earlier in November the US government had also finalized the Chips Act incentive with the company and it is expected to get up to $6.6 billion in grants and $5 billion in loans. TSMC’s second Arizona fab is expected to feature the N3 and N2 processes and is expected to be operational in 2028.
According to TrendForce, the first fab in Arizona will have an initial capacity of 20K wafers per month by year-end. TSMC is also in talks with Nvidia about producing its Blackwell chips at the Arizona plant; these chips are currently manufactured in Taiwan. However, these Blackwell chips will still need to be shipped back to Taiwan since the Arizona facility does not have CoWoS packaging capability. If the contract is finalized, Nvidia will be the third customer for the Arizona plant after Apple and AMD
According to Nikkie report, TSMC’s first plant in Japan will start mass-producing chips by the end of the year. The first fab is expected to produce less advanced chips. The company is also planning a second fab that could produce 6-nanometer and 12-nanometer chips, and is also discussing to build a third fab in Japan that could make advanced 3-nanometer chips.
Trade Wars
Due to its limited China exposure (about 12% of revenue) and the strong global demand for AI chips, TSMC is better positioned to mitigate any potential disruptions from the US-China trade war.
Valuation
The company trades at a P/E ratio of 32.3 and a forward P/E ratio of 22.3. The P/S ratio is 12.6 and a forward P/S ratio of 9.5. In the last five years, the P/E ratio peaked at 41.8 in February 2021 and hit a low of 10.3 in November 2022. The stock is now trading above its five-year average P/E ratio of 24.4.
Conclusion
TSMC plays a crucial role in the success of many leading AI companies, including Nvidia, Apple, AMD, Marvell, and Qualcomm, as it is their primary supplier of advanced semiconductor chips and has more than 90% market share manufacturing advanced AI processors. Given the continued growth of the AI economy, TSMC's importance in the semiconductor industry is expected to further increase.
Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
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