1 Surprising Way Taiwan Semiconductor Manufacturing (TSMC) Makes Money

Taiwan Semiconductor Manufacturing (TSMC) is experiencing robust growth fueled by surging demand for AI and data center build-outs, with its high-performance computing segment comprising 57% of Q3 sales. The company also benefits from a re-accelerating smartphone market, contributing 30% to Q3 sales, partly driven by strong demand from key customer Apple. TSMC reported Q3 revenue of $33.1 billion, a 41% year-over-year increase, and ADR earnings of $2.92, up 39%, yet it trades at a discount to the broader market at 30 times trailing-12-month earnings.

Analysis

Taiwan Semiconductor Manufacturing (TSM) is demonstrating robust financial performance, primarily driven by surging demand for Artificial Intelligence (AI) and ongoing data center build-outs. The High-Performance Computing (HPC) segment now constitutes 57% of its third-quarter sales, having become the dominant revenue source in early 2022. This strong demand propelled TSMC's Q3 revenue to $33.1 billion, marking a 41% year-over-year increase, with earnings per ADR soaring 39% to $2.92.

Beyond its AI-driven growth, TSMC's legacy smartphone segment is experiencing a significant re-acceleration, contributing 30% to Q3 sales. This resurgence is partly attributed to the success of Apple's (AAPL) iPhone 17, with Apple historically accounting for 24% of TSMC's total revenue. The recovery of this segment provides a diversified growth vector, reducing over-reliance on any single market.

Despite its market-leading technology, multiple growth drivers, and over $1 trillion in market cap added since early 2023, TSMC trades at an attractive valuation. The company's stock is priced at 30 times trailing-12-month earnings, representing a discount compared to the S&P 500's multiple of 31. This valuation suggests potential upside given its strong growth trajectory and critical role in the global semiconductor supply chain.

Key Decisions for Investors

• Investors should closely monitor TSMC's continued market share and technological leadership in advanced semiconductor manufacturing, particularly within the high-growth AI and data center segments.
• Evaluate the sustainability of the re-accelerating smartphone market and its contribution to TSMC's revenue diversification, especially given its strong relationship with key customers like Apple.
• Consider the current valuation of TSMC, which trades at a discount to the broader market despite robust growth and strong fundamentals, as a potential entry point or reason to maintain existing positions.