What Investors Need to Watch Before TSMC Reports Its Q3 2024 Results

Insights - In the world of semiconductor manufacturing, Taiwan Semiconductor Manufacturing Co Ltd (NYSE: TSM) – also known as TSMC – reigns supreme. That’s because the Taiwan-based chip foundry has built a formidable lead in the production of cutting-edge semiconductors, particularly the ones that power the computing behind Artificial Intelligence (AI). 

As a result, it’s estimated that TSMC alone produces around 90% of the world’s cutting-edge chips, with the smallest and most advanced in the world being the 3 nanometre (nm) chip – one nanometre is one-billionth of a metre. 

Investors in tech stocks tend to look at TSMC’s earnings as a bellwether for the broader semiconductor industry given its key clients include the world’s biggest companies, such as Nvidia Corp (NASDAQ: NVDA). 

TSMC is slated to report its latest Q3 2024 earnings before the market opens on Thursday 17 October. Here are some key indicators that investors should be watching. 

Watch AI chip demand

The unfolding AI revolution has been what's driving the global stock market higher and TSMC plays a crucial role in this. In Q2 2024, TSMC's revenue came in at US$20.02 billion, up 32.8% year-on-year from the same period in 2023.

Back then, TSMC had guided for its Q3 2024 revenue to come in between US$22.4 billion and US$23.2 billion. The week before its earnings, TSMC typically releases its quarterly sales number and last week TSMC announced that its Q3 2024 came in above expectations at US$23.6 billion – representing a 39% year-on-year increase.

As investors can see, that year-on-year revenue growth rate is accelerating (from the Q2 2024 pace) and a lot of that has to do with demand for AI chips. Net profit for the company is set to increase by a similar percentage year-on-year, according to analyst estimates. 

In Q2 2024, TSMC’s revenue from the production of 3nm and 5nm semiconductors made up 40% of overall revenue for the quarter so investors should be monitoring how much these cutting-edge chips contribute in its latest quarter.

Besides Nvidia, TSMC also counts Apple Inc (NASDAQ: AAPL), AMD (NASDAQ: AMD), and Qualcomm (NASDAQ:QCOM) among its customers so the production of these chips is a key indicator of how strong the AI demand is across the tech industry.  

Will TSMC increase capex allocation?

For TSMC, the amount of money that is required to build new (and even smaller) chips is extraordinary. During its Q2 2024 earnings, the company increased its projected capital expenditure (capex) budget to between US$30 billion and US$32 billion.

With geopolitical pressure to build its foundries outside of Taiwan, TSMC is stepping up investments in building new chip plants in countries such as the US, Germany, and Japan. As a result of higher labour costs and a less established semiconductor ecosystem in these countries, the costs of developing a plant are likely to be higher versus building in Taiwan.

Investors will be keen to understand what the capex outlook is for the company for the rest of 2024 and how this looks likely to change going into 2025. What that means for gross margins and operating margins – which have typically beaten market expectations – are some key metrics for investors to watch in the coming quarter.

Despite these concerns, TSMC has been a key beneficiary of the AI boom and investors expect this story to continue for a while yet. So far in 2024, TSMC’s New York-listed American Depository Receipts (ADRs) have soared 89.3% versus the 23.6% advance for the S&P 500 Index.