TSMC reports robust AI growth in Q2, but my strategy is to pause expansion efforts
In Q2 2025, Taiwan Semiconductor Manufacturing Company (TSMC) reported a stellar performance, with a 38.6% year-over-year growth in revenue, reaching an impressive $30.07 billion. This growth was primarily driven by the surging demand for advanced AI chips and high-performance computing semiconductors.
The strong results saw TSMC's earnings per American Depositary Receipt (ADR) reach $2.47, a 68% increase year-over-year, and the operating margin stood at an impressive 49.6%. The gross margin was also at the high end of analysts' expectations, at 58.6%.
TSMC's dominance in advanced semiconductor manufacturing, particularly with 3nm and 5nm technologies accounting for 60% of wafer revenue in Q2, positions the company at the forefront of AI and high-performance computing.
Following the earnings beat and a raised 2025 revenue forecast, TSMC's stock price jumped over 4% in after-hours trading. Brokers have an average short-term price target of $244.75, about 3% above the last closing price of $237.56, with the highest target at $270, suggesting a potential upside of nearly 14%.
The company's management forecasted revenue growth at around 30% year-over-year for the rest of 2025, up from the initial ~25%. However, TSMC is facing challenges such as delays in expansions in Taiwan and Arizona, which could constrain revenues.
Despite these challenges, TSMC's valuation remains attractive, with a current price of $245, indicating a marginal upside. The forecasted normalized earnings per share for the middle of 2026 is about $10.50, and the forecasted stock price for TSMC in 12 months is approximately $260. The forecasted P/E ratio for TSMC stock in 12 months is 25 in a base case.
TSMC's Q2 results have sent the stock towards record highs, and the company's leadership in AI chip production and ongoing high barriers to entry underpin both its current performance and positive guidance for 2026. However, broad Trump-era tariffs across steel, aluminum, and semiconductors of up to 50% could contribute to margin pressures for TSMC.
It's worth noting that North American revenue accounts for 75% of TSMC's total, compared to just 9% for China. The geopolitical risk associated with the Taiwan region is manageable if the Trump administration treats China with respect and diplomatic competition rather than heightening a trade war.
In summary, TSMC's Q2 2025 results, upgraded 2025 revenue outlook, and dominant technological positioning in advanced semiconductor manufacturing underpin strong near-term growth prospects. Despite some challenges, the company's leadership in AI chip production and ongoing high barriers to entry support a positive guidance for 2026.
The impressive 2025 Q2 results of TSMC, which includes a 38.6% year-over-year growth in revenue, have paved the way for investments in data-and-cloud-computing and health sectors, as the company's leadership in AI chip production will significantly improve these industries due to the integration of advanced technology, ensuring a positive outlook for 2026. Furthermore, the earnings beat and raised revenue forecast have boosted the company's stock price, with analysts' average short-term price target suggesting a potential upside of nearly 14%.
