Source: Jin10 Data

$Taiwan Semiconductor (TSM.US)$This year, the $420 billion market cap will face a valuation test when it announces its earnings next week. Analysts expect the chip maker to raise its full-year sales outlook.

According to the median estimate from analysts surveyed by Bloomberg, the world's largest contract chip maker could announce 29% growth in net income for the second quarter on Thursday. More importantly, $JPMorgan (JPM.US)$ and $Morgan Stanley (MS.US)$Analysts expect the company to raise full-year sales guidance, providing a reason for a new round of valuation expansion.

Similar to nvidia, taiwan semiconductor has become investors' favorite AI bet, with few competitors able to replicate its cutting-edge technology. With increasing demand, taiwan semiconductor has the bargaining power to raise prices on advanced chips. Analysts have been chasing its valuation and target price since the company's market cap soared to $1 trillion earlier this week in the USA. $NVIDIA (NVDA.US)$This NVIDIA and taiwan semiconductor, the only suppliers of the most advanced chips, had previously expected full-year revenue growth of about 20%. However, this expectation is increasingly seen as too conservative, especially in June when sales performance exceeded Samsung Electronics and major customers.

"Investors are realizing that Taiwan Semiconductor is the "pick and shovel" of the artificial intelligence theme," said Jian Shi Cortesi, the investment portfolio manager at GAM Investment Management, whose largest fund holds Taiwan Semiconductor stock as its biggest holding. "In my opinion, demand for artificial intelligence should maintain at least for the next several quarters as there are no signs of a slowdown in demand for artificial intelligence chips."

nvidia and taiwan semiconductor are the only suppliers of the most advanced chips. They had previously expected full-year revenue to grow by about 20%. But this expectation is increasingly considered too conservative, especially after its June sales performance surpassed that of Samsung Electronics and major customers. $Apple (AAPL.US)$Analysts$Broadcom (AVGO.US)$.

Taiwan Semiconductor announced its Q2 sales grew by 40%, exceeding the average prediction of 36%. This helped boost investors' expectations.

At the beginning of this year, Taiwan Semiconductor's valuation was 13 times its forecast PE for 2025. In six months, this number has jumped to 21 times. Analysts say evidence of improving profit margins for Taiwan Semiconductor will further boost this valuation.

"The acceleration of earnings growth should push for a re-rating of its valuation. The higher margins could push earnings growth to 25%, or even 30%, so valuations could expand to at least 25 times," said Kevin Wang, an analyst at Suo Securities.

Investors will closely study Taiwan Semiconductor's tone during the earnings conference call for further clues on chip market recovery and artificial intelligence demand trends. Artificial intelligence chip orders will help make up for sluggish smartphone sales, which have only just begun to recover from a slump. Higher-end smartphones demand and product upgrades in the high-performance computing sector could lead to higher prices for more advanced semiconductors. Morgan Stanley estimates Taiwan Semiconductor could increase prices for its most advanced chips by 3% to 6% for different customers.

Some signs suggest that some investors are concerned about its valuation. Data from the Taiwan Stock Exchange shows foreign investors have sold Taiwan Semiconductor stocks for five consecutive trading days as of this Thursday.

Including Gokul Hariharan, Morgan Stanley analysts write in a report on July 7, "As more than 50% of revenue will rise at a mid-single-digit rate, this signals evidence of further profit margin growth, which will bring in more than 100 basis points by 2025," adding that they expect the company's gross margins to jump to 58% next year, higher than market expectations.

Despite this, there are still signs that some people are concerned about its valuation. According to Bloomberg's calculations, its market cap now far exceeds the total market cap of all Latin American companies in MSCI's Emerging Markets Index, which is tracked by millions of dollars of funds globally.

Robert Cheng, an analyst at Bank of America, said, "Everything in the artificial intelligence supply chain is in short supply right now. The valuations of Taiwan Semiconductor stocks are not high. They have profit support."

"Investors are realizing that Taiwan Semiconductor is the 'pick and shovel' of the artificial intelligence theme," said Jian Shi Cortesi, the investment portfolio manager at GAM Investment Management, whose largest fund holds Taiwan Semiconductor stock as its biggest holding. "In my opinion, demand for artificial intelligence should maintain at least for the next several quarters as there are no signs of a slowdown in demand for artificial intelligence chips."

Editor / jayden