TSMC Earnings In-depth Review: Only Tariffs Can Defeat the Invincible Chip Giant

TSMC released its financial report for the first quarter of 2025 on April 17 (ending March 2025), with the following key points:

1) Its revenue reached 25.53 billion U.S. dollars, an increase of 35.3% year-on-year in U.S. dollar terms, which is higher than the midpoint of the earnings guidance.

2) The gross margin reached 58.8%, a decrease of 0.2% quarter-over-quarter and an increase of 5.7% year-over-year. The guidance was 57% to 59%. The continued increase in the proportion of 3nm and 5nm contributed to the continued rise in the average selling price of the company's products.

3) Wafer process structure: The proportion of 5nm and below increased from 46% in the same period last year to 58%. High Performance Computing (HPC) was the main source of revenue growth for the company this quarter, accounting for 59%, up from 53% in the previous quarter. Meanwhile, the proportion of mobile chips decreased from 35% in Q4 2024 to 28%.

4) TSMC's earnings guidance: For the second quarter of 2025, the expected revenue is forecasted to be between 28.4 and 29.2 billion U.S. dollars, with the gross margin still estimated to be between 57% to 59%. Despite clients needing to adapt to tariff changes, TSMC's guidance remains resilient.

5) Capex plan: TSMC executives stated at the earnings conference held at 2:00 am E.T. on Thursday that they will maintain the capital expenditure forecast for 2025 at between US$38 billion and US$42 billion unchanged.

Overall, TSMC has delivered a financial report with fairly good results, mainly due to thecontinued growth in demand for computational chips. Still, its growth may be partly due to customers stockpiling smartphones or other products in anticipation of U.S. tariff policies.

~The proportion of advanced processes continues to expand

In the first quarter, TSMC's 3nm process accounted for 22%, mainly used for Apple's iPhone 16 series A18 processors, which is higher than 9% in the same period last year. The 5nm process accounted for 36%, slightly above the level for the entire last year. Processes above 7nm accounted for 27%, continuing to decline from 35% in the same period last year. TSMC is expected to achieve mass production of the 2nm process this year.

~ TSMC dominates over its peers in R&D capabilities

One core metric for foundries is transistor density. TSMC's transistor density at the same process far exceeds its competitors. Increased transistor density allows for more complex circuit designs and functionalities, thus enhancing the computational power, processing speed, and efficiency of chips. Additionally, as transistor size decreases, the power consumption also decreases.

Report has summarized the indicators of TSMC, Samsung, and Intel from various dimensions including transistor density, trial production yield, technology route, and customer ecosystem.

~ High-execution management and research teams drive technological moat development

The development of TSMC's technology has been significantly influenced by several executives, notably Dr. C.C. Wei and Douglas Yu. As TSMC's chairman and CEO, Dr. C.C. Wei played a key role in advancing 2nm and CoWoS advanced packaging technologies. Through Silicon Via (TSV) packaging technologies were successfully developed under the leadership of Douglas Yu.

TSMC invests a substantial amount of R&D funds annually, with R&D expenses reaching $1.72 billion in the first quarter. The management team is capable of efficiently driving the progress of technological projects and quickly transforms them into actual productivity. Taking its advanced processes as an example, the time to mass production has been continuously shortened, from the 7nm process in 2018, the 5nm process in 2020, to the 3nm process in 2022.

~ Chip foundry services will become more expensive due to scarcity

In 2024, TSMC and its subsidiaries had an annual capacity of over 16 million 12-inch wafers. Considering TSMC's monthly production capacity target of 50,000 wafers for the 2nm process by the end of 2025, this equals an annual capacity of 600,000 wafers. Assuming TSMC's total annual capacity in 2025 remains around 16 million wafers, the 600,000 wafers of 2nm capacity will account for 3.75% of the total, but due to the higher pricing of 2nm chip foundry services, the revenue share will far exceed 3.75%.

Historical data shows that each 12-inch wafer costs $10,000 for 7nm foundry services, $20,000 for 3nm, and the 2nm era is expected to see a further price increase, with market estimates suggesting that 2nm pricing could reach $30,000.

~ What should investors worry about?

1. Intel and Samsung's improvements in yield rates for the 2nm process could pose a threat to TSMC's market share.

However, despite management reforms and technological breakthroughs at Intel, its customer base remains far weaker than TSMC's. Currently, Intel's advanced process manufacturing primarily supplies its own PC chips and has secured orders from Nintendo, but Nvidia, Broadcom, and AMD are still in the customer testing phase.

According to TrendForce data, TSMC holds nearly 100% of the 3nm market share. Although Samsung and Intel are attempting to skip the 3nm process and directly develop the 2nm, TSMC’s technological leadership and scaled production capacity create a "double barrier" that competitors are unlikely to overcome in the short term, and these two companies do not have clear production capacity arrangements.

Additionally, TSMC has a broad range of partners and a mature industrial chain in the semiconductor supply chain, allowing design manufacturers like Nvidia to fully utilize efficient supply chain services. Switching to Intel or Samsung would require re-establishing relationships, potentially facing issues with raw material supplies and component matching.

Migration costs are also very high. For example, Intel's 10nm process and Samsung's 5nm process have slight differences in performance and chip layout compared to TSMC's similar processes. Other chip giants need to re-evaluate and redesign their chip's physical layout and circuit connections to ensure production yield and performance at the new foundry.

2. Additionally, tariff policies from the Trump administration could increase volatility in TSMC's stock price.

TSMC mitigates political risks by diversifying investments in factories across different countries and regions, though this could periodically make capital expenditures more costly. Furthermore, changes in the growth rate of the AI industry could also impact TSMC. The high-performance computing (HPC) business accounts for over 50% of TSMC's revenue. A gradual slowdown in orders from giants like Nvidia could also drag down TSMC's revenue.

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