To The Moon

$Taiwan Semiconductor Manufacturing(TSM)$

In an earnings season fraught with uncertainty, Taiwan Semiconductor Manufacturing Company (TSMC) has once again proven why it sits atop the semiconductor value chain. Reporting better-than-expected quarterly earnings and issuing upbeat guidance, the world’s largest contract chipmaker sent a strong signal to global markets: the chip sector’s downturn may finally be bottoming. The company’s robust results have reignited hopes for a sustained rebound in semiconductor demand, even as questions linger about the pace of recovery and structural headwinds in certain segments.

TSMC’s earnings beat comes at a critical moment for the broader technology industry. After nearly two years of cyclical declines in memory prices, PC sales, and handset shipments, investors are eager for signs that inventory corrections have run their course and that secular growth drivers — such as artificial intelligence (AI), high-performance computing (HPC), and automotive chips — are resuming their upward trajectory. But is this rebound durable? And does it mean now is the right time for investors to pick semiconductor stocks?

Below, we unpack TSMC’s latest results, explore what they reveal about the broader semiconductor landscape, and evaluate whether this rally is worth chasing.

TSMC’s Earnings: A Welcome Surprise for Investors

TSMC’s latest quarterly report handily beat Wall Street expectations. Revenue climbed 5% year-over-year, reversing two consecutive quarters of declines. Net income came in nearly 10% higher than analysts’ consensus, fueled by demand from advanced nodes like 3nm and 5nm, which continue to be the company’s bread and butter.

Management also delivered guidance that exceeded expectations, projecting mid-to-high single-digit revenue growth for the next quarter and reiterating its full-year forecast of mid-teens growth. Notably, CEO C.C. Wei struck an optimistic tone on the earnings call, emphasizing that AI-related demand is accelerating even faster than previously anticipated. He also noted that inventory levels across the supply chain are normalizing — an encouraging sign for the broader industry.

Importantly, TSMC’s gross margins expanded to 54%, demonstrating the company’s continued ability to command premium pricing for its cutting-edge process technologies, even in a competitive environment. That margin strength underscores the company’s unique position in the ecosystem as a near-monopoly provider of the most advanced foundry services.

AI Demand Continues to Be the Bright Spot

One of the clearest takeaways from TSMC’s earnings is that AI is not just a buzzword — it’s driving real revenue. Demand for high-performance chips used in AI training and inference continues to outstrip supply, as hyperscale cloud providers and enterprises race to build out their infrastructure.

TSMC reported that its HPC segment, which includes AI processors, grew more than 20% year-over-year and now accounts for over 40% of total revenue. That’s a staggering figure, and it highlights a secular growth engine that seems insulated from the typical boom-bust cycles plaguing other semiconductor categories like memory or consumer electronics.

This AI-driven demand is benefiting not only TSMC but also its customers, including Nvidia, AMD, and even Intel (for its foundry clients). As such, it’s reasonable to expect that names levered to advanced process technologies and AI workloads will continue to outperform.

Smartphone and PC Markets Show Early Signs of Recovery

While AI is stealing headlines, TSMC’s results also hinted at early stabilization in other key end markets. After more than a year of sluggish demand and inventory drawdowns, smartphone and PC shipments are starting to recover modestly. TSMC’s mobile segment posted flat year-over-year growth — a notable improvement over the double-digit declines seen in previous quarters.

This nascent recovery is supported by recent third-party data, which shows that global smartphone shipments returned to positive growth in the latest quarter, driven by strong demand in emerging markets and the launch of new flagship models. Similarly, PC demand is showing tentative signs of life as enterprises resume hardware upgrades after deferring purchases during the pandemic and subsequent downturn.

Still, management was cautious in its commentary, noting that these markets remain below pre-pandemic levels and could take several more quarters to fully rebound. Investors should temper expectations for an immediate V-shaped recovery.

Capex Discipline Points to Improving Supply-Demand Balance

One underappreciated factor in the chip sector’s rebound is the newfound discipline in capital expenditures (capex) across the industry. After years of overbuilding capacity — particularly in memory and legacy nodes — most semiconductor manufacturers have scaled back aggressive expansion plans. TSMC itself revised down its capex forecast slightly earlier this year, citing the need to align with customer demand.

This capex discipline is crucial to restoring pricing power and preventing another glut. In memory markets, for instance, Micron and SK Hynix have curtailed production and cut back on investments, helping stabilize pricing in DRAM and NAND. In the foundry space, TSMC’s restrained capacity additions should allow utilization rates to improve and margins to stay healthy.

That said, geopolitical risks and government industrial policies remain wildcards. The push by the U.S., Japan, and Europe to develop domestic semiconductor capacity could result in inefficient, redundant supply if not carefully managed.

Valuation: Are Semiconductor Stocks Still Cheap?

On the heels of TSMC’s strong earnings, semiconductor stocks have rallied sharply, with the SOX index up over 30% year-to-date. That raises an important question for investors: are chip stocks still attractive at these levels?

TSMC trades at roughly 18x forward earnings — above its historical average of 15x but still reasonable given its dominant position and long-term growth prospects. Other names in the sector present a mixed picture: Nvidia continues to command a premium multiple north of 40x forward earnings, reflecting its outsized AI exposure, while memory players like Micron and Western Digital trade closer to cyclical trough valuations.

Overall, while valuations are no longer deeply depressed, they don’t appear stretched either, especially in light of improving fundamentals. Investors should, however, remain selective and favor companies with clear exposure to secular growth drivers (like AI and automotive) and strong competitive moats.

Risks That Could Derail the Recovery

Even as TSMC’s results inspire confidence, it’s important to acknowledge the risks that could undermine the chip sector’s rebound. Chief among them are geopolitical tensions — particularly U.S.-China relations. Any escalation over Taiwan could disrupt TSMC’s operations and ripple across the global supply chain.

Another risk is the possibility of demand shortfalls if economic conditions deteriorate. The semiconductor industry remains highly cyclical and sensitive to macroeconomic headwinds. A slowdown in enterprise IT spending or consumer sentiment could temper the pace of recovery.

Finally, competition is intensifying, especially as rivals like Samsung and Intel pour billions into advanced process technologies and as governments subsidize domestic manufacturing. While TSMC maintains a technological lead today, the landscape is constantly evolving.

What Should Investors Do Now?

For long-term investors, TSMC’s strong performance underscores the enduring appeal of the semiconductor sector — particularly its role as the backbone of transformative technologies like AI, autonomous vehicles, and cloud computing.

Investors looking to add exposure might consider a barbell approach: combining best-in-class leaders like TSMC and Nvidia with more cyclical, value-oriented names like Micron that stand to benefit from the next upcycle. Exchange-traded funds (ETFs) such as the iShares Semiconductor ETF (SOXX) or VanEck Semiconductor ETF (SMH) also offer diversified exposure.

Timing, of course, remains tricky. While the worst of the downturn appears to be over, the recovery may be uneven, and near-term volatility is likely. Investors with a multi-year horizon should find today’s valuations reasonable for accumulating positions.

Conclusion: TSMC Signals a Turning Point

TSMC’s earnings beat and bullish guidance provide a much-needed vote of confidence in the semiconductor sector’s outlook. With AI demand surging, inventory corrections fading, and capex discipline improving supply-demand dynamics, the stage appears set for a sustained rebound — albeit one that may unfold in fits and starts.

For investors, the key takeaway is that the semiconductor industry remains indispensable to the modern economy and offers compelling long-term growth opportunities. However, the road ahead is not without risks, and selectivity will be critical in navigating this next phase of the cycle.

As the industry transitions from cyclical lows toward secular growth, those willing to stay the course — and to bet on the leaders — may well be rewarded.

Takeaways:

1. TSMC delivered strong earnings and raised guidance, signaling a potential bottom in the chip sector downturn.

2. AI-related demand continues to be the primary growth driver, benefiting advanced node leaders like TSMC.

3. Early signs of recovery are emerging in smartphones and PCs, though full normalization will take time.

4. Capex discipline across the industry should support margins and prevent oversupply.

5. Valuations are reasonable, but geopolitical and macro risks warrant a measured, selective approach.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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