Taiwan Semiconductor Manufacturing (NYSE: TSM) inched up on Thursday after posting better-than-expected earnings for its second financial quarter.
However, the management recorded a marginal decline in gross margins and said foreign exchange headwinds and lower profitability at overseas fabs could result in a further hit to margins in Q3.
According to the world’s largest contract chip manufacturer, its gross margin could erode another 300 basis points to 55.6% in the third quarter.
That said, sinking margins aren’t necessarily a red flag for those invested in TSMC.
In fact, there are three compelling reasons to remain bullish on TSMC stock at current levels.
TSMC stock to benefit from exceptional US demand
On the earnings call, C.C. Wei, the chief executive of TSMC, said the company is accelerating its chip production timeline by several quarters due to “strong interest” from leading US customers.
This signals robust demand from renowned names, likely including Apple, Nvidia, and AMD, who rely on TSMC’s advanced nodes for AI and high-performance computing chips.
The urgency to ramp up volume production reflects confidence in future orders and reinforces the semiconductor firm’s strategic importance in the global supply chain.
Even amidst margin compression, its ability to scale quickly in response to customer demand is a bullish signal for long-term growth.
Plus, TSMC shares currently pay a dividend yield of 1.17% as well.
Commitment to mitigating tariff risks could help TSMC shares
TSMC’s recent pledge to invest $165 billion in advanced semiconductor manufacturing in the US is more than a growth initiative – it’s a geopolitical hedge.
With six wafer fabs, two packaging facilities, and an R&D center underway in Arizona, the Taiwan-based company is positioning itself to sidestep potential trade disruptions.
This is especially relevant as President Trump has threatened steep tariffs on Taiwan.
By localizing production, TSMC not only strengthens its ties with US customers but also reduces exposure to tariff-related shocks, making its long-term margin outlook more resilient.
Note that TSMC stock is currently up some 75% versus its April low.
Barclays raises price target on TSMC
On Thursday, famed investor Jim Cramer also agreed that the margin outlook is “not at all” a concern for TSMC investors, as the company has a history of underpromising and over-delivering.
Barclays analysts also raised their price target on the semiconductor stock following its Q2 results today, citing flawless execution, productivity gains, and continued demand for AI chips.
The investment firm now sees upside in TSMC stock to $275, indicating potential for another 12% gain from here.
Taiwan Semi’s leadership in advanced nodes was among other reasons cited for the positive view.
The aforementioned three reasons, together, reinforce that TSMC’s longer-term growth potential easily overshadows near-term margin risks.
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