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TSM Stock Nudges Lower After Good Third Quarter

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Taiwan Semiconductor Manufacturing Company (TSM - Free Report) reported a strong quarter that was likely driven by its key customers Apple (AAPL - Free Report) , which is reportedly seeing stronger demand for iPhones after taking down prices; Advanced Micro Devices (AMD - Free Report) , which is leaning on it for its 7nm high performance computing (HPC) and other chips; and NVIDIA (NVDA - Free Report) , which is using it for its graphics chips.

The strong demand is leading TSM to build out capacity, which accounts for the 14.3% year-over-year increase in net PP&E. At the same time, its maturities are coming forward (55.9% reduction in long-term debt and 53.8% increase in current liabilities), so the 3.2% reduction in cash on hand may not be a particularly wonderful thing.

Here are some of the numbers-

Revenue of $9.40 billion was up 21.3% sequentially and 10.7% year on year (better than the guided $9.1-$9.2 billion).

More than half of it came from the advanced technology nodes of 7nm, 10nm and 16nm, which accounted for a respective 27%, 2% and 22% of revenue in the last quarter.

Smartphones were the biggest end market, contributing 49% of revenue, HPC 29%, IoT 9%, DCE 5%, automotive 4% and other 4%.

Gross margin of 47.6%, around 460 basis-point (bp) increase sequentially and a 20 bp year on year increase (toward the higher end of the guided 46.0%-48.0% range).

Operating margin was 36.8% around 510 bp higher sequentially and 20 bp higher than last year (toward the higher end of the guided 35.0%-37.0% range).

As a result, EPS of NT$3.90 increased from NT$2.57 in the second quarter and NT$3.44 in the year-ago quarter.

Operating cash flow grew 50.7% while free cash flow grew 80.8%.

Guidance for the fourth quarter: Revenue of $10.2billion to $10.3 billion ($1=30.6NT$), gross margin 48%-50% and operating margin 37% to 39%.

Considering the way capacity is being built up, there shouldn’t be any concern about TSM’s ability to meet the growing demand from AMD and NVIDIA while also keeping up with Apple’s increased expectations. In fact, the company looks poised to take share from Intel (INTC - Free Report) as AMD gains market share.

TSM shares currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.



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