Shares of Semiconductor manufacturing in Taiwan (NYSE: TSM), also known as TSMC, rose 63% in the first six months of 2024, according to data provided by S&P Global Market Intelligence. TSMC is the world’s largest microchip maker and its customer list includes some of the largest semiconductor companies. It has produced impressive financial results as the semiconductor industry bounces back from a cyclical slowdown.
TSMC has posted impressive financial results this year
TSMC got the year off to a strong start with an upbeat quarterly report in January. The company’s revenue and profits shrank compared to last year, but the results were better than Wall Street forecasts. The fourth quarter showed significant improvement over the third quarter, suggesting that the semiconductor industry is entering a cyclical boom period.
Electronics sales suffered in 2023 as consumers faced high interest rates, inflation and a tough job market. This led to a build-up of semiconductor inventories among smartphone and PC makers, which is bad news for chipmakers. Weak demand and high inventories translate into lower chip sales volume and unit prices, leading to volatile financial results for semiconductor stocks.
TSMC’s financial performance tends to be highly sensitive to cyclical trends due to its role as a manufacturer for many major chipmakers. This was shown in the first half of 2024. The company’s top line grew 16% in the first quarter. Sales then accelerated in the second quarter, with TSMC reporting a whopping 60% year-over-year growth for the month of April. It maintained this momentum with growth rates of over 30% in May and June. The bottom line improvements were even more impressive. TSMC generated approximately $250 million in free cash flow in the first quarter, up from $80 million in the first quarter of 2023.
Semiconductor stocks enjoyed industry-wide momentum
Optimism is playing a big role in TSMC’s rally. The stock’s forward P/E ratio has almost doubled to 30. Investors are willing to pay a much higher premium to hold the stock.
of iShares Semiconductor ETF grew by 28% during the first six months of 2024, so there is something positive at the industry level. Nvidia AND Broadcom have charged more thanks to the demand for high-performance hardware to run AI applications. These companies are two of Taiwan Semi’s largest customers. Some of its other big customers also enjoyed a positive first half, including Apple, Qualcomm, Marvell technologyAND AMD. If most of your biggest customers are having good years, there’s a good chance you’ll share the spoils.
Investors are resetting their expectations for AI-driven microchip demand. It appears that the industry is in the early stages of growing demand for these applications, and this is offsetting the macroeconomic weakness that is affecting consumer activity. TSMC is in an excellent position to take advantage of these market dynamics, and investors are pushing higher valuations to keep up.
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Ryan Downie has positions in Nvidia and Qualcomm. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, Qualcomm, Taiwan Semiconductor Manufacturing and the iShares Trust-iShares Semiconductor ETF. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a disclosure policy.
Here’s why Taiwan’s semiconductor is up 63% in the first half of 2024 was originally published by The Motley Fool