Why Taiwan Semiconductor Manufacturing Stock Popped on Tuesday

Why Taiwan Semiconductor Manufacturing Stock Popped on Tuesday

Taiwan Semiconductor Manufacturing (NYSE: TSM) stock was up 2.1% through 2 p.m. ET Tuesday. As hometown daily paper DigiTimes reported this morning, Intel has tapped TSMC to manufacture its new line of 3nm semiconductor chips for notebook computers.

What's more, production of the chips is already commencing.

What it means for Intel... and for TSMC

This sounds like good news for Intel... and for TSMC. In a related story from May, DigiTimes noted that TSMC had already hit a 95% "utilization rate" for 3nm chip production, meaning that production capacity was just about maxed out. Intel may have been just in time to secure its contract to supply the 3nm chips it has designed.

The news should be even better for TSMC, however. If production capacity was at 95% a month ago, then signing up a big customer like Intel has probably pushed that utilization rate up very close to 100% by now. This in turn implies that TSMC is getting all its money's worth out of the manufacturing equipment it has installed, and is probably working at very high efficiency -- implying strong profit margins.

More than that, though, with demand for its 3nm chips so high, you have to assume that TSMC has strong pricing power for its services, implying even stronger profit margins.

Is TSMC stock a buy?

Indeed, yet another DigiTimes story from just this past weekend seems to confirm that this is what's happening, and that semiconductor chip customers "are bracing for TSMC forthcoming price increases."

Data from S&P Global Market Intelligence show that TSMC endured three straight quarters of falling gross profit margins starting at the end of 2022, but margins have more or less stabilized over the last three quarters. Now, they're likely headed back up.

At 28.5 times trailing earnings, I wouldn't call TSMC a "cheap stock" exactly. But long-term estimates show earnings growing at nearly 21% per year. With even faster growth rates projected this year and next, now might be a good time to buy TSMC stock.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.