US chip stocks rally buoyed by TSMC’s strong sales forecast

US chip stocks surged on Thursday thanks to Taiwan Semiconductor Manufacturing Co’s (TSMC) solid sales projections that boosted investor confidence in the industry. The industry projects solid demand for processors that are required to power AI.

TSMC is the largest global contract chipmaker. Recently, the chip-making firm shared a positive outlook on annual growth. It conveyed that AI chip sales will make up the mid-teen percent of the revenue for the whole year. Analysts say the company has delivered a blowout quarter and guidance, giving it a buy recommendation.

Positive TSMC projections reinforced investor confidence

Shares of US-listed TSMC have increased by 12.5% after reporting third quarter net profit jumped 54%. This has pumped the market capitalization, poised to $1 trillion if the gains hold. This comes as projections from the leading advanced AI chips producer bolstered investor confidence for TSMC whose market values have jumped in the past two years, thanks to a boom in chip spending by Big Tech.

The US-listed TSMC’s customers and AI chipmaking giant Nvidia as well as AMD put on more than 2% each. Peers, Broadcom and Micro jumped by between 1.5% and 3%.

Even struggling chipmaker Intel’s shares added 1.3% of value as the firm has been expanding chip fabrication facilities in an attempt to challenge TSMC in advanced contract manufacturing something analysts believe won’t happen overnight but expected to take years.

“Nvidia is one of TSMC’s major customers, so there is a direct read-across to the American chip firm in the Taiwanese company’s results.”

AJ Bell investment analyst Dan Coatsworth.

According to Reuters, TSMC’s outlook also ushered in some relief to investors following deep forecast cuts from chipmaking equipment firm ASML ignited concerns of slower than expected recovery in demand for semiconductors not used in AI.

“Fortunately, everything is fine in AI land,” Coatsworth said.

“TSMC said demand was strong for both AI-related business and from smartphones, implying that the chip sector still has momentum,” added Coatsworth.

TSMC records strong earnings performance

TSMC’s net income for the third quarter period came in at 325.3 billion New Taiwan dollars or $10.1 billion, surpassing an LSEG estimate of NT$300.2 billion.

At $23.5 billion, net revenue for the quarter was up 36% year on year, with the company’s gross margin rising to 57.8% during the July to September period, compared to 54.3% during the same period in the prior year.

“Based on the current business outlook, we expect for our fourth-quarter revenue to be between $26.1 billion and $26.9 billion, which represents a 13% sequential increase or a 35% year-over-year increase at the midpoint,” TSMC Chief Financial Officer Wendell Huang said during an earnings call following the results release.

In a statement accompanying the financial, TSMC revealed that during the third quarter its business was “supported by strong smartphone and AI-related demand for our industry leading 3nm and 5nm technologies.

During the third quarter under review, shipments of 3nm chips accounted for 20% of the company’s total wafer revenue while 5nm and 7nm accounted for 32% and 17% respectively. Advanced technologies, defined as 7nm and smaller nodes, accounted for 69% of total wafer revenue.

Market watchers are upbeat about the company’s full year performance with Needham analyst Charles Shi projecting an increase in revenue.

“TSMC expects to more than triple AI revenue this year, which will account for (a) mid-teens percent of TSMC’s total revenue,” Shi said in a client note.

“Based on management commentary, we estimate TSMC’s AI revenue was around $4 billion last year, and will likely reach $13 billion this year.”

Shi.

TSMC’s AI chips are projected to account for an estimated 20% of its total revenue by 2028.

Another analysts, Mark Li from Bernstein maintained his outperform rating on the stock.

“Near-term results and guide are a clean beat,” he said in a client note. “We find comfort in TSMC as technology, efficiency, and trust ensure long-term growth,” he added.