AI Continues to Drive Growth at Taiwan Semiconductor Manufacturing, but Is the Stock a Buy?

While the investor reaction to its most recent earnings report was largely muted, Taiwan Semiconductor Manufacturing (NYSE: TSM), or TSMC for short, once again reported another quarter of strong revenue and profit growth. As the leading semiconductor manufacturer in the world, the company continues to benefit nicely from the rise in demand for artificial intelligence (AI) infrastructure.

Let's take a closer look at TSMC's results and prospects to see if investors should buy the stock at current levels.

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An AI winner, but trade policy concerns

There is little doubt that TSMC has established itself as an AI winner. The company's technological expertise and scale has led it to become an invaluable part of the semiconductor value chain and a vital partner to top chip designers such as Nvidia.

This could be seen in the company's first-quarter results, as revenue soared 35% to $25.5 billion, while its gross margin expanded 190 basis points year over year to 58.8%. The margin improvement came despite an earthquake impacting its Kumamoto manufacturing facility in Japan during the quarter. TSMC has demonstrated strong pricing power in recent years, which has helped it increase its gross margin.

This is leading to strong profitability growth. Its earnings per American depositary receipt (ADR) surged 54% to $2.12 from $1.38 a year earlier, while its net income in local currency jumped 60%. Both its revenue and earnings came in nicely ahead of analyst consensus estimates.

However, the company is expecting some gross margin compression both next quarter and in the coming years due to the ramp-up of overseas fabrication facilities, including in Arizona. It said the ramp-up of its facilities in Kumamoto and Arizona will dilute margins by 2% to 3% for the full year 2025.

Growth was once again led by AI chips, with high-performance computing (HPC) accounting for 59% of its revenue in the quarter. HPC revenue rose 7% sequentially. A year ago, the segment accounted for 46% of the company's revenue.

Smartphone chip sales slipped 22% quarter over quarter due to seasonality and represented 28% of its overall revenue. A year ago, smartphone revenue was 38% of the total. The year-over-year shift toward HPC revenue shows the major impact AI chips are having on TSMC's business.

More of TSMC's revenue also continues to come from its advanced technologies. Nodes 7 nanometers (nm) and under accounted for 73% of its revenue, up from 65% a year ago. Its newest 3nm technology made up 22% of total wafer revenue, surging from just 9% a year ago.

TSMC guided for second-quarter revenue to come in between $28.4 billion and $29.2 billion. That would represent about 35% year-over-year growth at the midpoint of its guidance range. It projected gross margin to be between 57% and 59% and operating margin to range from 47% to 49%.

The company maintained its full-year outlook for revenue to increase by close to mid-20% levels. Longer-term, it is looking for a 20% revenue compound average growth rate (CAGR) between 2024 and 2029 with a 53% gross margin.

TSMC said thus far it has seen no changes to its customers' behavior due to tariffs. The company continues to see robust AI-related demand and expects a modest recovery in its other end market segments. Meanwhile, it continues to work with customers to plan out its capacity growth. As a result of planning with customers, it expects AI revenue to grow by a mid-40s-percentage CAGR over the next five years.

Image source: Getty Images.

Is now the time to accumulate TSMC stock?

Investors have some tariff and trade policy concerns regarding semiconductors, given the recent actions of the Trump administration. However, TSMC is seeing strong growth coming from AI chips and has a solid roadmap to increase capacity in line with its top customers' needs. It's also working to stay in the Trump administration's good graces by building out its U.S. manufacturing presence.

With competitors struggling, TSMC has established itself as one of the most important players in the world of advanced semiconductors. As such, despite all the trade war noise, the company is still very well positioned over the long term to benefit from the AI infrastructure buildout.

Meanwhile, TSMC's stock is cheap from a valuation perspective, trading at a forward price-to-earnings (P/E) ratio of 16 times based on analysts' 2025 estimates and price/earnings-to-growth ratio (PEG) of less than 0.5. Stocks with PEG ratios below 1 are generally viewed as undervalued.

As such, investors who can withstand the near-term volatility in the market should look to begin to establish positions in this high-quality company, as TSMC appears poised to be a long-term winner.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.