1 Magnificent Stock to Buy After TSMC's Blockbuster Earnings Report

Taiwan Semiconductor Manufacturing (NYSE: TSM), popularly known as TSMC, is a key player in the tech sector as it manufactures chips for several companies that serve multiple industries, ranging from smartphones to computers to data centers to the Internet of Things (IoT).

That's the reason why the Taiwan-based foundry's quarterly results can be used as a barometer to gauge the health of other companies as well. For example, Apple (NASDAQ: AAPL) is reportedly the top customer of TSMC's chips, accounting for 25% of the latter's top line. Apple taps TSMC's fabrication facilities to manufacture the processors used in iPhones and iPads.

That's why TSMC's terrific third-quarter results, which were released on Oct. 17, tell us that the business of its top customer is likely to be in solid shape. The Taiwanese company reported a 36% year-over-year increase in revenue to $23.5 billion, along with a 54% jump in earnings. Its results bested Wall Street's expectations, and more importantly, the guidance suggests that its healthy growth is here to stay.

TSMC now expects to finish 2024 with a 30% increase in revenue, up from its prior expectation of mid-20% growth. More specifically, the midpoint of TSMC's revenue guidance of $26.5 billion for the current quarter would translate into a year-over-year jump of 35%. This could be great news for Apple investors. Let's look at the reasons why.

TSMC's results point toward healthy iPhone demand

The A18 and A18 Pro processors used in Apple's latest iPhone 16 models are manufactured using TSMC's second-generation 3-nanometer (nm) process node. Reports about the sales of the latest iPhones have been mixed, with some suggesting that the devices aren't selling as well as Apple had hoped for, while other reports indicate that the demand remains solid.

TSMC's latest results give us more clarity about the state of iPhone demand. The foundry giant points out that the sales of chips manufactured using its 3nm process node accounted for 20% of its revenue last quarter. That was up from just 6% in the same quarter last year. In simpler terms, TSMC sold $4.7 billion worth of 3nm chips in Q3 as compared to just over $1 billion in the same quarter last year.

Investment bank TD Cowen estimates that Apple is paying $45 for each A18 Pro processor used in the iPhone 16 Pro models, up from $40 last year. Investors should note that Apple wasn't using TSMC's 3nm technology node across all of its iPhone models last year. The iPhone 15 and the iPhone 15 were using processors based on TSMC's 4nm node, while the Pro versions used the 3nm technology.

This time, all of Apple's iPhone models are powered by processors manufactured using TSMC's 3nm process node, which is one of the reasons why TSMC's revenue from this technology has increased remarkably on a year-over-year basis. There's a strong likelihood that Apple was the only customer for TSMC's 3nm chips last quarter. That's because TSMC's other key customer, Nvidia, has been using its 4nm process node to manufacture its graphics process units (GPUs).

Assuming Apple purchased all of TSMC's 3nm chips at an average price of $45 per chip, it would have procured around 100 million processors. That's around 10% higher than Wedbush Securities' estimate that Apple would be manufacturing 90 million units of the iPhone 16 in 2024.

Meanwhile, J.P. Morgan points out that the lead times of the Pro models of the iPhone 16 remain high at over 3 weeks. So, if Apple is witnessing long lead times despite an increase in production from last year's levels of 80 million units, there is a chance that its new devices are witnessing strong end-market demand.

One reason that's likely to be the case is because of an estimated installed base of 300 million iPhones that haven't been upgraded in four years. Given that Apple is now going to offer generative artificial intelligence (AI) features on its smartphones, this huge installed base of users will now have a strong reason to upgrade to Apple's new iPhones.

Stronger-than-expected iPhone sales could send Apple stock higher

As such, don't be surprised to see Apple's iPhone sales figures remaining robust in the final quarter of the year. Moreover, the large installed base of aging devices should trigger an upgrade cycle which should allow the tech giant to report stronger growth in the coming year and beyond. This probably explains why analysts have increased their revenue expectations from Apple for the next couple of years.

AAPL Revenue Estimates for Current Fiscal Year data by YCharts

Consensus estimates suggest that Apple ended its recently concluded fiscal 2024 (which ended on Sept. 30) with $390 billion in revenue, which would be an increase of less than 2% from the previous year. However, the chart above tells us that Apple's top line is expected to increase in the high single digits over the next couple of fiscal years.

All of this indicates that now may be a good time to buy shares of Apple before it goes on a further bull run following the 22% gains that it has clocked so far this year.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, JPMorgan Chase, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.