Semiconductor Stocks Weaken Despite TSMC's Strong Q2 Performance

On the 17th of July, Taiwan Semiconductor Manufacturing Company (NYSE: TSM) announced its Q2 2025 results. Despite seemingly encouraging results for the current fiscal year (FY) 2025, the stock has been slipping in favour, despite being the principal foundry for NVIDIA (NVDA) and other high-conviction tech companies.

Trend Analysis

As of the first half (H1) of the FY, TSMC’s top and bottom lines are seemingly surging to break past the previous year’s results.

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Source: Company Information, Leverage Shares analysis

If current trends continue, the company’s revenue will grow 26% over the previous year, while its earnings per share (EPS) is projected to grow 36% over the previous year’s. While annual revenue growth is in line with that seen in the previous FY, the EPS growth is significantly outsized.

Meanwhile, costs such as total operating costs (include research and development) are only projected to grow by about 16-18% with similar trends in cost of revenue. The dropping cost of revenue has been a trend since 2023 now.

Source: Company Information, Leverage Shares analysis

Meanwhile, operating/R&D expenses are returning back to long-term trends seen before 2023. Increasing pass-throughs to operating and net incomes essentially prop up the solid outperformance in growth seen in the EPS.

In terms of platforms and regions, there were a few quick shifts relative to Q1 2025:

Source: Company Information, Leverage Shares analysis

Automotive and consumer electronics have registered a rise over Q1 2025, which might be on account of a large number of Qualcomm’s Snapdragon chips (among others) being shipped to China. Xiaomi has recently been slammed¹ for using the Snapdragon 8 Gen 3 – a “consumer-grade” chip typically found in smartphones and gaming consoles. “Consumer-grade” components – as per Li Fenggang, the vice president of China’s “Big Four” state-owned automobile combine FAW-Audi – lack the robust environmental certifications required for automotive-grade components, along with potentially a shorter lifespan and lower thermal tolerance. Tesla had done a similar exercise in China in the past, leading to a large-scale recall when the chips started failing after overheating.

However, this might be a trend being tried out by China’s EV carmakers, who continue to struggle to cut corners while engaging in a price war. TSMC’s positioning here is particularly advantageous and possibly explains the rise in China’s share in revenue from Q1 2025 through Q2 2025.

AI Hype Impact and Market Concerns

In Q2 2025, North America has slipped back to the 75% share of revenue by region that was achieved by the end of 2024 while the company states² that it continues to see growth in artificial intelligence and demand for its most advanced technologies. Almost exactly corresponding with its revenue share in North America is the company’s reporting that advanced chips with sizes 7-nanometer or smaller – predominantly featured in AI-related chips’ architecture – accounted for 74% of its total wafer revenue in Q2 2025.

However, since its earnings release, the company’s American-listed and Taiwan-listed tickers have been in decline – with Nvidia also following suit while the broad-market S&P 500 runs largely flat.

Source: Leverage Shares analysis

This is on account of a number of factors: earlier in June, the Trump administration warned while in the midst of trade talks with Taiwan (which has a 32% tariff imposed on its exports to the U.S.) that there could be additional tariffs on semiconductors. While tariffs wouldn’t necessarily stem demand for AI chips, this potentially implies that its clients – such as Nvidia – would be facing profit margin pressures to fulfil demand and sales obligations. Furthermore, it’s possible that TSMC’s clients would ask for TSMC to shoulder some of the additional cost as well.

The relative flatness of the S&P 500 – despite the massive size held by the likes of Nvidia within the index – is highly suggestive of the notion that investors have rotated out of chip stocks to other sectors such as consumer discretionary, energy and financials.

In Conclusion

While TSMC is continuing to work on setting up facilities in Dresden (Germany) and Arizona (U.S.) in a bid to parry some of the tariffs’ impact, it will be quite some time before these facilities come online, the workforce is trained and a substantial portion of the component mix is sourced/produced locally. Until it does, a certain amount of margin attenuation – which will be felt keenly at the EPS level – can be expected. Chip stocks carry a substantial amount of overvaluation on the back of outsized convictions, which translate to volatility in stock price. While demand for AI chips in the Western Hemisphere can be reliably expected to persist and even be relatively stable due to inevitable replacement/upgrade cycles, price volatility can be expected in the course of tariff impacts and accelerated spends on new infrastructure.

Professional investors in Europe might like to consider the +3x Long Taiwan Semiconductor ETP (TSM3) for magnified exposure during upticks of the stock’s trajectory while the -3x Short Taiwan Semiconductor ETP (TSMS) can be employed during downturns for magnified gains. Broad exposure to the semiconductor sector’s trajectory can also be considered via the +3x Long Semiconductors ETP (SMH3) during upsides and the -3x Short Semiconductors ETP (SMHS) during downsides. In addition, chip leader Nvidia’s stock performance can be tracked via the +3X Long Nvidia ETP (NVD3) as well as the -3X Short Nvidia ETP (NV3S).

Footnotes:

«Xiaomi Slammed for Using Phone Chips in New YU7 Battery Electric Crossover», EV.com, 16 July 2025
«TSMC profit surges 61% to record high fueled by AI chip demand», CNBC, 17 July 2025

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