TSMC and ASML stock moves show sky-high investor hopes for chip sector

Two of the biggest names in chip manufacturing, Taiwan Semiconductor Manufacturing Co. and ASML, both reported strong earnings this week as demand for artificial intelligence chips remains sky high.

But that didn’t seem to matter to Wall Street.

TSMC reported a 58% increase in first-quarter profits Thursday, beating estimates and hitting a new record. It was the fourth-consecutive quarter of record profits for the world’s largest chip manufacturer.

“AI-related demand continues to be extremely robust,” President and CEO of TSMC C.C. Wei said in an earnings call Thursday.

Yet TSMC shares fell about 3% on Thursday.

61% of TSMC’s overall revenue in Q1 came from the high-performance computing segment, which includes AI chips made for its largest customer, Nvidia. That segment was up from 55% the previous quarter.

“The results have been good, but they were expected to be. And whenever people see some of these semis trade a bit down on good numbers, that creates a little bit of a fast money rotation,” Jordan Klein of Mizuho Securities told CNBC in an interview.

Gross margins also came in higher than last quarter at 66%, likely because TSMC’s dominance in leading-edge chips allows it to raise prices for huge customers like Apple and Nvidia that rely heavily on chips made at 7nm and below. Those advanced chips made up about 74% of revenue.

“I also think that they’re turning away some of this more mature, lagging-edge business and devoting it to more leading-edge,” Klein said.

One weak point was smartphone revenue, which fell 11% compared to the previous quarter as the industry faces an ongoing memory shortage.

Investors were also looking for impacts from the Iran war. TSMC executives said they don’t expect any near-term impact from energy and supply chain disruption from the conflict, adding that it has a safety inventory of specialty gases, such as helium and hydrogen.

ASML dropped as much as 6.5% on Wednesday, though shares came back to close about 2.5% lower, amid concerns over shrinking sales to China and sky-high expectations from investors. Shares sank another 3% Thursday.

The Dutch maker of chip manufacturing equipment posted strong first-quarter results and raised its forward guidance, but that only brought it in line with what investors wanted to see.

The failure of either stock to catch a tailwind from positive reports could be a bellwether for the wider chip industry as earnings season rolls on.

It is also the latest example of how astronomical expectations have weighed on chipmaker stocks. Last quarter, Nvidia’s blowout fourth-quarter earnings report was met with a 5% sell-off.

ASML’s extreme ultraviolet lithography machines cost upwards of $400 million each. They’re the only machines in the world capable of etching the minuscule designs necessary for making the most advanced chips that TSMC…