Taiwan Semi Conductor Reports a Surge in Profits. CEO Says AI Capacity is Very Tight

Taiwan Semiconductor Manufacturing Co. (TSMC) reported better-than-expected earnings on Thursday, highlighting strong artificial intelligence (AI) demand as a key factor helping to counterbalance a typically slow period for smartphone sales.

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The world's largest contract microchip manufacturer, which counts Nvidia among its major clients, posted a 57% jump in fourth-quarter earnings, reaching NT$374.7 billion ($11.37 billion), or NT$14.45 per share. This result exceeded analysts' expectations of NT$14.34 per share, according to TradeAlgo.

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The company had previously disclosed a 39% rise in revenue for the fourth quarter, totaling NT$868.5 billion. Following the earnings release, TSMC shares rallied 4% in premarket trading and have gained 83% over the past 12 months.

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For the entirety of 2024, TSMC saw robust growth across its key segments. Revenue from high-performance computing surged 58%, while smartphone chip sales climbed 23%. Meanwhile, internet-of-things, automotive, and digital consumer electronics revenues grew modestly, each increasing by 2% to 4%.

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Looking ahead, TSMC forecasts first-quarter revenue between $25 billion and $25.8 billion, ahead of analysts' consensus estimate of $24.6 billion from FactSet. The company also anticipates a gross margin of 58% at the midpoint, slightly down from the 59% reported in the fourth quarter.

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This decline is attributed to the initial costs of ramping up production for advanced technologies, such as 2-nanometer chips and chip-on-wafer-on-substrate (CoWoS) with silicon interposer, which are essential for AI and supercomputing. Additionally, the company cited the impact of its overseas factories in Kumamoto, Japan, and Arizona, which are in the early stages of operations.

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TSMC remains optimistic about its long-term prospects, citing industry megatrends such as 5G, AI, and high-performance computing. CFO Wendell Huang stated on a conference call, “We are well-positioned to capture the multi-year structural demand from these trends in 2025.”

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The call also included a noteworthy exchange between TSMC CEO CC Wei and JPMorgan analyst Gokul Hariharan. Hariharan analyzed the numbers and estimated that the new Arizona plant would start with gross margins of just 10%. “I don’t think TSMC has ever started a fab at 10% gross margin,” Hariharan remarked, according to a transcript from S&P Global Market Intelligence. Wei responded, “Gokul, we are working hard to improve it,” without confirming or denying the margin estimate.

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New restrictions from the Biden administration on AI microchip exports were another topic of discussion. Wei expressed confidence that the initial impact of these restrictions would be “manageable,” noting that TSMC is assisting its clients in obtaining special export permits to navigate the regulatory environment.

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Wei also addressed concerns about the company’s capacity to meet growing AI demand, acknowledging that TSMC is operating with “very tight capacity.” However, he emphasized the company’s commitment to supporting its customers. “I don’t want to say I’m the bottleneck. TSMC is always working very hard with customers to meet their requirements,” Wei said.

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TSMC’s investments in cutting-edge technologies, such as 2-nanometer chips and CoWoS packaging, underscore its strategy to remain at the forefront of the semiconductor industry. These technologies are critical for AI and high-performance computing applications, areas where demand is expected to grow significantly.

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The company’s expansion into overseas facilities, particularly in Japan and the U.S., is another focal point. While these factories contribute to the company’s global footprint, they also pose near-term financial challenges, including start-up costs that weigh on margins. The Arizona plant, in particular, has drawn attention for its projected low initial margins, though TSMC is confident in its ability to improve profitability over time.

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With strong earnings, a solid revenue outlook, and continued leadership in advanced semiconductor technologies, TSMC remains well-positioned to capitalize on industry trends. However, the company faces challenges such as navigating geopolitical risks, managing tight production capacity, and addressing near-term margin pressures from new facilities.

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As it stands, TSMC’s ability to balance innovation, global expansion, and financial discipline will be critical in sustaining its leadership in the semiconductor market. While investors remain optimistic about the company’s growth trajectory, they will closely monitor how TSMC manages these complexities in the coming quarters.

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