Semi Sector Goes Wild Again?

The semiconductor industry is buzzing once more, with $Taiwan Semiconductor Manufacturing(TSM)$ delivering a blockbuster Q4 2025 earnings report that not only shattered expectations but also ignited a rally across the sector. Shares of TSMC surged over 4% in early trading, while $ASML Holding NV(ASML)$, a key supplier of chipmaking equipment, jumped as much as 7.6% to a record high, pushing its market capitalization above $500 billion for the first time. This enthusiasm stems from TSMC's robust results and optimistic outlook, underscoring the unrelenting demand for AI-driven chips and sending ripples through related stocks like $Lam Research(LRCX)$ and $Applied Materials(AMAT)$.

TSMC's Stellar Earnings: Numbers That Speak Volumes

TSMC, the world's largest contract chipmaker, reported a net profit of NT$505.74 billion (approximately $16 billion) for the fourth quarter of 2025, marking a 35% year-over-year increase and beating analyst estimates of NT$478.4 billion. Revenue climbed 20.5% to NT$1.046 trillion ($33.7 billion), up 25.5% in U.S. dollar terms, driven primarily by high-performance computing (HPC) applications, including AI accelerators. Earnings per share (EPS) came in at NT$19.50 ($3.14 per ADR), reflecting the company's pivotal role in the AI ecosystem.

Key highlights from the earnings include:

• Gross Margin Expansion: Reached 62.3%, up 2.8 percentage points sequentially, thanks to cost improvements, favorable forex rates, and high capacity utilization.

• AI Revenue Dominance: Advanced nodes (7nm and below) accounted for 77% of wafer revenue, with HPC (largely AI-related) making up 55% of total sales.

• Cash Flow Strength: Generated NT$726 billion in cash flow, ending the quarter with about $98 billion in cash and marketable securities.

Compared to prior periods, these figures represent TSMC's seventh straight quarter of double-digit profit growth, highlighting its resilience amid global economic uncertainties. The company's leadership in advanced process technologies, such as 3nm and 5nm nodes, continues to attract major clients like Nvidia, Apple, and AMD.

TSMC's American Depositary Receipts (ADRs) climbed as much as 5.6% following the announcement, breaking out above previous resistance around $330 to hit $344.68. The one-year chart shows a steady upward trajectory from lows near $160 in early 2025, fueled by AI tailwinds, with recent volatility giving way to a bullish consolidation and breakout. This move aligns with the company's strong fundamentals, as AI demand pushes utilization rates higher.

Similarly, ASML's shares soared, reflecting the direct read-through from TSMC's plans. The long-term chart for ASML illustrates a dramatic rise from around $400 in mid-2023 to $1,355.66, with the latest surge crossing a key horizontal resistance near $1,300. The stock's performance underscores investor confidence in the equipment maker's exposure to the AI infrastructure buildout, where TSMC's expansions translate to increased orders for ASML's extreme ultraviolet (EUV) lithography machines.

Social media reactions echoed this excitement, with analysts and investors highlighting the implications. One post noted, "TSMC posts record Q4 profit as AI chip demand surges beyond expectations," emphasizing the doubling of AI accelerator revenue expected in 2026. Another upgrade from Goldman Sachs raised TSMC's price target by 35%, citing AI as a "multi-year growth engine" with capacity tightness persisting through 2027.

The earnings beat didn't just lift TSMC— it propelled the broader semiconductor sector. ASML, which supplies critical lithography tools to TSMC, saw its shares rise over 5%, topping $500 billion in market value as TSMC's capex guidance signaled stronger demand for EUV systems. Analysts project ASML's sales to grow in the mid-teens for 2026, accelerating to mid-twenties in 2027, potentially driven by TSMC installing 40-45 EUV tools alone.

Other equipment providers like Lam Research and Applied Materials also gained 4-6%, as TSMC's expansions boost demand for etch, deposition, and process-control tools. The Philadelphia Semiconductor Index (SOX) rose about 3%, with chip designers like Nvidia and AMD benefiting indirectly from the confirmed AI spending surge.

One analyst noting, "When TSMC surges capex, downstream connectivity spend jumps." This sentiment aligns with broader market optimism, as hyperscalers like Google and Amazon ramp up custom chip production to meet AI needs.

Looking ahead, TSMC guided Q1 2026 revenue between $34.6 billion and $35.8 billion, implying 38% year-over-year growth at the midpoint, with gross margins of 63-65%. For the full year, the company forecasts nearly 30% revenue growth in U.S. dollars, supported by a massive $52-56 billion capital expenditure budget—up to 37% higher than 2025's $40.9 billion. About 70-80% of this capex will target advanced technologies, including 2nm ramps and overseas expansions in Arizona and Japan.

Analysts are bullish, with projections of 40% CAGR in AI chip revenue through 2029 and gross margins staying above 60%. However, challenges loom: Supply constraints in high-bandwidth memory (HBM), potential policy risks from export restrictions, and macroeconomic headwinds could temper growth. Competition from Samsung and Intel in advanced nodes adds uncertainty, though TSMC's dominance—producing chips for nearly all major AI players—remains unchallenged.

The key questions: Can AI demand keep TSMC's momentum intact into 2026? With token consumption exploding and hyperscalers investing heavily, signs point to yes. And is the market underpricing TSMC's AI exposure? At current valuations around 30-35x forward earnings, some argue yes, given the structural tailwinds and lack of viable alternatives.

TSMC's results reaffirm that the AI revolution is far from over—it's accelerating. From data centers to edge devices, the need for advanced silicon is insatiable, benefiting the entire supply chain. While valuations are stretched, the fundamentals suggest this "semi sector wild ride" has more legs. Investors should watch upcoming ASML earnings on January 28 for further confirmation. In a world increasingly powered by AI, TSMC and ASML aren't just stocks—they're the backbone of tomorrow's tech.

@MillionaireTiger @Tiger_comments @Daily_Discussion @CaptainTiger @TigerSG

Disclaimer: This is a general analysis and not financial advice. Views in this post may be biased. Always conduct your own research before making any investment decisions.