Taiwan Semiconductor (TSMC) Stock: Q1 Dip Offset By Strong AI and 3nm Demand

TLDR

Q1 2025 revenue came in at $25.5 billion, down 5.1% year-over-year. AI-related revenue rose sharply; 3nm and 5nm accounted for 58% of wafer revenue. Operating margin slipped slightly to 48.5%. TSM expects Q2 revenue between $28.4 and $29.2 billion. Company to double CoWoS capacity and invest $100 billion in U.S. expansion.

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Taiwan Semiconductor Manufacturing Co Ltd (NYSE: TSMC) reported Q1 2025 earnings of USD25.5 billion, a 5.1% decrease year-over-year. This was in line with seasonal expectations and reflected a slowdown in smartphone demand. Gross margin came in at 58.8%, slightly lower than Q4 2024, while operating margin declined 0.5 percentage points to 48.5%.

Smartphone revenue, which comprised 28% of total sales, declined by 22% quarter-over-quarter. The Internet of Things (IoT) segment also contracted, dropping 9%. Despite the slowdown, earnings per share reached TWD13.94, and the return on equity remained high at 32.7%. At close, April 17 at 4:00:03 PM EDT, the stock closed at $51.74 (0.05%).

Taiwan Semiconductor (TSM)

Advanced Nodes and AI Demand Continue to Drive Growth

One of the standout themes this quarter was TSMC’s reliance on advanced technologies. The 3nm process contributed 22% of wafer revenue, and the 5nm node contributed 36%. Altogether, technologies 7nm and below made up 73% of wafer revenue, reflecting strong demand from high-performance computing (HPC) clients.

Revenue from the HPC segment rose 7% quarter-over-quarter and made up 59% of the total. Automotive and data center end-markets also showed strength, growing by 14% and 8% respectively. These trends demonstrate a clear shift in customer demand from consumer electronics to enterprise-level compute.

Outlook: Resilience Backed by Capacity and CapEx

TSMC guided for Q2 revenue between USD28.4 billion and USD29.2 billion, a sequential increase of roughly 13%. Margins are expected to hold steady, with gross margin projected between 57% and 59%, and operating margin in the 47% to 49% range.

To meet anticipated AI-related demand, TSMC plans to double its CoWoS (Chip-on-Wafer-on-Substrate) capacity in 2025. This packaging technology is vital for advanced AI workloads and supports the growing demand for Nvidia and AMD chips.

The company is also expanding globally. It has announced an additional $100 billion investment plan to scale up its Arizona operations. This move not only improves customer proximity but also helps hedge against geopolitical risks in the Taiwan Strait.

Risks: Overseas Costs and Tariff Uncertainty

Despite the growth prospects, TSMC faces several near-term headwinds. Overseas expansion is contributing to cost pressures, with management warning of a 2% to 3% full-year margin dilution. This impact may rise to 3% to 4% in future years as new fabs ramp up.

There’s also growing uncertainty around U.S.-China tech tensions. The Biden administration is considering new export control policies to restrict access to key technologies for firms like China’s DeepSeek. TSMC, which plays a crucial role in the global AI supply chain, could be caught in the crossfire of these policy shifts.

Strong Balance Sheet Supports Strategic Growth

TSMC’s financial position remains robust. It ended Q1 with TWD2.7 trillion (USD81 billion) in cash and marketable securities. CapEx reached over USD10 billion in Q1 alone, indicating its aggressive investment in capacity, R&D, and packaging innovation. The company generated TWD626 billion in cash from operations, which supports its ability to self-fund expansion without heavily relying on debt.

Accounts receivable turnover increased slightly to 28 days, and inventory days rose to 83. These metrics reflect longer delivery cycles for advanced nodes but remain manageable.

Conclusion: Well-Positioned for AI-Led Growth

While TSMC experienced a revenue dip and margin pressure in Q1, it remains well-positioned to benefit from secular trends in AI, automotive, and HPC. Its aggressive CapEx, expanding global footprint, and dominance in advanced node technologies suggest long-term resilience. However, investors should watch for geopolitical developments and overseas cost inflation, which could cloud the short-term outlook.

 

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