To The Moon

TSMC Q2 Earnings Preview: AI Boom vs. Margin Gloom?

Core Focus: What Is the Market Watching?

$Taiwan Semiconductor Manufacturing(TSM)$   is set to announce its Q1 2025 earnings before the U.S. market opens on July 17, 2025. Propelled by robust AI-driven demand for High-Performance Computing (HPC) in the first half of the year, Q2 revenue reached a record NT$933.792 billion, an increase of 39% year-over-year and 11% quarter-over-quarter. However, due to significant foreign exchange volatility, the Q2 USD revenue is approximately $29.2 billion—at the high end of the $28.4-$29.2 billion guidance range. This is based on an exchange rate of 31.9 NTD to the USD, compared to the 32.5 rate used for the guidance.

Three Key Things to Watch：

1. Market Outlook and Short-Term Variables

The market remains bullish on AI-driven demand fueling growth in the semiconductor industry. The long-term demand certainty for compute power, led by GPUs and ASICs, remains high. However, tariffs and foreign exchange rates present short-term variables for performance. The current market consensus for TSMC's Q2 EPS is NT$68.03, representing a 41% year-over-year increase.

2. Gross Margin: The Primary Focus

Gross margin stands out as the key focus of this earnings report. In the short term, TSMC faces two primary headwinds on its gross margin: foreign exchange volatility and the impact of its Arizona fabs. The company previously indicated that a 1% appreciation of the New Taiwan Dollar (NTD) against the USD would reduce its gross and operating margins by 0.4 percentage points. The NTD appreciated approximately 7% against the USD in Q2, implying a potential drag of nearly 3 percentage points on the gross margin. TSMC's Q2 guidance for gross margin is 57%-59%, while the current market consensus is in the 57%-58% range.

Furthermore, following last quarter's announcement of an additional $100 billion investment to build five more fabs in the United States, reports from Taiwanese media in June stated that the Arizona facility has already shipped its first 20,000 4nm wafers to Apple, Nvidia, and AMD. The full extent of the margin drag from the Arizona fabs remains to be seen.

3. Potential for a Revised Full-Year Guidance

A key area of focus will be whether TSMC revises its full-year guidance upward. Currently, 59% of TSMC's revenue is derived from its High-Performance Computing (HPC) business, driven by clients like $NVIDIA (NVDA.US)$ , $Broadcom (AVGO.US)$ , and $Advanced Micro Devices (AMD.US)$. In contrast, the smartphone segment, with key customers such as $Apple (AAPL.US)$ , $Qualcomm (QCOM.US)$ , and MediaTek, now accounts for only 28%. The weakness in the global smartphone market has been evident; according to IDC, global smartphone shipments grew by only 1.5% YoY in Q1 2025, marking the fourth consecutive quarter of single-digit growth. It remains to be seen if the smartphone business, led by Apple's iPhone 17 series, can drive growth in the second half of the year.

Over both the short and long term, TSMC's primary growth engine remains its AI chip foundry business. With the volume ramp-up of Nvidia's GB300 series and Google's TPU v6e expected in the second half, the HPC segment is poised to continue setting records. Last quarter, management provided full-year guidance for mid-20s percent revenue growth in USD terms. Investors will be watching closely to see if this forecast is revised upward.

Options Market Signals

From an options perspective, despite a high Open Interest (OI) put/call ratio of 1.38—which indicates strong pessimistic or hedging sentiment in the market—the Implied Volatility (IV) Rank stands at only 14. This suggests that the cost of purchasing options to position for future significant price swings is currently at a relative historical low.

Summary of Risks and Opportunities

Potential Positive Catalysts: Product price increases; CoWoS capacity expansion.

Risks to Monitor: Impact of tariffs; effects of foreign exchange volatility.

Valuation: TSMC currently trades at a P/E (Price-to-Earnings) multiple of 27.03x, which is within its historical mid-range and below the semiconductor industry average P/E of 46.15x.

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