Taiwan Semiconductor Manufacturing, NYSE: TSM, climbed on Thursday following the announcement of better-than expected earnings for its second quarter.
The management reported a slight decline in gross profit margins, and warned that foreign exchange headwinds as well as lower profits at overseas factories could cause margins to be further impacted in Q3.
The world’s biggest contract chip maker has predicted that its gross margin will drop another 300 basis point to 55.6% during the third quarter.
Sinking margins don’t always mean TSMC is a bad investment.
There are actually three reasons why TSMC’s stock is still a good buy at the current price.
TSMC stocks to benefit from US demand
C.C. Wei, the CEO of TSMC said that the company has accelerated its chip production schedule by several quarters because “strong interest” was shown from major US customers.
Apple, Nvidia and AMD are likely to be among the renowned companies that rely on TSMC for high-performance AI chips and advanced nodes.
This urgency reflects confidence about future orders, and strengthens the strategic importance of the semiconductor company in the global supply chains.
Its ability to respond quickly to the customer’s demand, even if margins are compressed, is a positive sign for growth on the long term.
Plus, TSMC’s shares pay a current dividend yield of 1.17%.
TSMC’s shares could benefit from a commitment to mitigate tariff risk
TSMC’s recent commitment to invest $165billion in advanced semiconductor production in the US represents more than a business growth strategy – it is a geopolitical hedge.
The Taiwanese company has built six wafer factories, two packaging plants, and a R&D facility in Arizona to avoid potential trade disruptions.
It is particularly relevant, as Trump has threatened to impose steep tariffs against Taiwan.
Localizing production allows TSMC to strengthen its ties with US clients and reduce its exposure to shocks related tariffs. This makes its margins more robust on the long term.
Note that TSMC’s stock has risen by 75% since its low in April.
Barclays raises price target on TSMC
Jim Cramer, a famous investor, also said on Thursday that the margin forecast is “nothing” to worry about for TSMC shareholders, since the company’s history has been one of overdelivering and underpromising.
Barclays analysts have also increased their price targets on the stock of semiconductors following today’s Q2 results. They cited flawless execution, productivity increases, and continued AI chip demand.
The firm sees TSMC’s stock rising to $275. This means that a further 12% increase is possible.
Taiwan Semi was praised for its leadership position in the field of advanced nodes.
Together, the three factors above confirm that TSMC’s growth potential over the longer term easily outweighs any near-term risks to margins.
The post TSMC Stock: 3 Reasons Why Taiwan Semi’s Sinking Margins Aren’t Concerning may be updated as new information becomes available
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