Market Insights

Chip stocks are an important part of the market because of their wide use across the economy. Yesterday, a key player gave investors a big shot of confidence in the group.

Taiwan Semiconductor (TSM) gained almost 3 percent after announcing quarterly results. As its climbed, other big names like Intel (INTC), Advanced Micro Devices (AMD) and Nvidia (NVDA) reversed earlier losses and flipped to green.

TSM’s report featured not only better-than-expected earnings and revenue. Management also forecast third-quarter sales of $19.8 billion to $20.6 billion. That was about 9 percent higher than consensus estimates.

“Our customers’ demand continues to exceed our ability to supply,” CEO C.C. Wei said on a conference call. “We expect our capacity to remain tight throughout 2022.”

TSM is important because it’s the world’s biggest semiconductor stock by market capitalization. It’s also No. 2 in revenue behind INTC, according to TradeStation data.

Margins and Demand

One of the takeaways from TSM’s latest quarter was its ability to maintain profitability. Gross margins, the difference between revenue and the manufacturing costs, expanded by 3.5 percentage points from the previous quarter. That suggests that pricing remained strong and little impact from inflation.

The report helped offset worries about slowing weaker demand because of customers amassing big inventories after the pandemic. Even though TSM acknowledged the headwind, management thinks the pullback will be less extreme than feared.

One of the big reasons is that chips continue to advance as they’re used in more complex applications like smart phones and data centers. That prevents them from growing overly commoditized, which in turn supports profit margins. It’s a new dynamic for an industry once dominated by the monolithic PC market.

Semiconductor Stocks

TSM’s bounce followed a dip below $75 last week. It was the stock’s lowest price in almost two years.

Other chip companies have had similar pullbacks. AMD and NVDA recently touched their lowest levels since May 2021. The industry-tracking Philadelphia Semiconductor Index ($SOX) is also down 35 percent from its all-time high earlier this year.

It’s not a surprise, given their sensitivity to the global economy and the Federal Reserve’s interest-rate hikes. But most companies have continued to beat estimates, including Qualcomm (QCOM), AMD and NVDA. Will there be more positive surprises with more numbers expected soon?

Here are some other upcoming names and dates to know:

• ASML (ASML): The Dutch provider of semiconductor equipment reports earnings before the opening bell next Wednesday, July 20.
• Texas Instruments (TXN): The maker of industrial and automotive chips reports after the closing bell on July 26.
• Lam Research (LRCX): The maker of chip-manufacturing gear announces results after the closing bell on July 27.
• Qualcomm (QCOM): The communications-chip company reports after the closing bell on July 27.
• Chip maker Intel (INTC) reports after the closing bell on July 28.
• Advanced Micro Devices (AMD): The semiconductor company issues quarterly results the afternoon of August 2.