Taiwan aims to have agreement with US that benefits both sides

Taiwan aims to have agreement with US that benefits both sides

Taiwan is actively pursuing a trade agreement with the United States that could benefit both economies. The initiative, which aims to be finalized before the August 1 tariff imposition deadline, seeks to mitigate potential trade disruptions and foster mutual growth. This development is particularly significant for Taiwan Semiconductor Manufacturing (TSM), a leading global semiconductor manufacturer, as it could alleviate the impact of tariffs on its operations.

TSM recently reported robust earnings, with its full-year revenue growth guidance raised by 30% in USD terms from the mid-20s. The company's June-quarter revenue stood at TWD 934 billion ($30.1 billion), marking an 11% sequential increase. Despite a 17 basis point decline in gross margin to 58.6%, the strong demand for AI and higher utilization in mature process nodes have supported the higher full-year guidance [1].

The company's management has expressed confidence in its ability to reach gross margins in the high 50s in the long term. This optimism is grounded in the pricing strategy for the 2 nm node, which includes larger markups, and the firm's efforts to broaden the appeal of 3 nm-7 nm nodes to cost-conscious customers as equipment finishes depreciation [1].

Morningstar Equity Research has raised its fair value estimate for TSM's stock to $306 per share from $262, citing better guidance and a long-term outlook that underestimates the market's overestimation of tariff effects and underestimates the longevity of AI investments. The firm's revenue and EPS estimates for 2025-29 have been boosted by 5% and 9%, respectively, reflecting a higher AI contribution and better outlook in industrial and smart home markets [1].

The potential trade deal between Taiwan and the US could have a limited effect on TSM, as the company has ample 4 nm capacity that can be used by US clients, should tariffs escalate beyond the expected 20% [1]. However, the cautious 2026 outlook of its supplier ASML could indicate that TSM is outspending competitors like Intel and Samsung, further reducing their chances of catching up.

In conclusion, Taiwan's pursuit of a trade agreement with the US presents a favorable opportunity for TSM to mitigate potential tariff impacts and capitalize on the insatiable demand for AI-driven technologies. Investors and financial professionals should closely monitor this development and its potential implications for TSM's future performance.

References:
[1] https://www.morningstar.com/stocks/taiwan-semi-earnings-firm-shrugs-off-tariff-blows-amid-insatiable-ai-demand