Morningstar

TSMC Earnings: Cutting Fair Value Estimate as Tariffs Hit Non-AI Outlook

The stock remains undervalued, and is our top pick among semiconductor foundries.

The TSMC logo seen on the Taiwanese semiconductor contract manufacturing and design company building in Hsinchu.
Walid Berrazeg/SOPA Image via Getty
Securities in This Article
Taiwan Semiconductor Manufacturing Co Ltd ADR
(TSM)

This analysis was originally published as a stock note by Morningstar Equity Research.

Key Morningstar Metrics for Taiwan Semiconductor Manufacturing

What We Thought of Taiwan Semiconductor Manufacturing’s Earnings

Taiwan Semiconductor Manufacturing’s TSM first-quarter 2025 revenue was TWD 839 billion (USD 25.5 billion), down 3% sequentially. Gross margin dipped 21 basis points sequentially to 58.8%. The numbers were at the high end of management’s guidance.

Why it matters: We think it is reasonable for TSMC to reiterate its full-year guidance of mid-20s revenue growth and capital expenditure of USD 38 billion-USD 42 billion. This is because the firm is spending on advanced capacity to meet strong artificial intelligence demand, especially in the US.

  • Second-quarter sales guidance is exceptionally strong at 12% sequential growth, which could mean customers are shipping as many chips as possible during the 90-day tariff pause. The effects of tariffs are likely to be felt in 2026 when current inventories are depleted.
  • Management projects gross margin dilution by overseas fabs to widen by 100 basis points to 300-400 basis points around 2028 or 2029, citing inflation and tariffs. We assume TSMC is passing on incremental tariff costs without the markup and resulting in no harm to returns on investments.

The bottom line: We trim our fair value estimates for TSMC to TWD 1,700 (USD 262 per ADR) from TWD 1,800 on lower 2026 revenue and EPS. TSMC is undervalued in our view and is our top pick among semiconductor foundries.

  • We keep our 2025 assumptions unchanged as TSMC’s guidance is still for mid-20s revenue growth in 2025 and orders committed today take up to six months to fulfill. We expect tariffs to hit revenue by 4% in 2026 in non-AI segments, with minimal change to the structural outlook.

Coming up: The US has begun an inquiry to determine sectoral tariffs for semiconductors and consumer electronics. We currently assume a 10% tariff as TSMC produces mainly in Taiwan and will review our forecasts once the rates are finalized.

Bears say: The market may have underestimated the fall in demand for consumer electronics if sectoral tariffs turn out to be higher than the 25% levied on automotive parts.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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