Taiwan Semiconductor's (TSM  ) earnings reports have become highly anticipated as it is the largest semiconductor producer in the world, handling production for companies like AMD (AMD  ) and Nvidia (NVDA  ). Shares were lower, following the company's Q2 results which showed it meeting expectations for earnings but dropping on profit margin concerns.

Many tech stocks have been weak since mid-February including Taiwan Semiconductor. Since then, the stock is down by nearly 20% along with most other semiconductor stocks. In recent weeks, some tech stocks have put together decent rallies to retest and in some cases exceed their February highs, however, Taiwan Semiconductor has remained range-bound.

Inside the Numbers

In Q3, Taiwan Semiconductor reported $0.93 per share in earnings, an 18% increase from last year's Q2 and in line with analysts' expectations. Revenue increased by 28% to $13.3 billion in the quarter. However, shares were lower as its outlook came in below expectations, and there were indications of compression in profit margins.

For the next quarter, Taiwan Semiconductor forecasts revenue between $14.6 billion and $14.9 billion. This compares to last year's Q3 revenue of $12.4 billion and last year's Q3 revenue of $12.4 billion.

The company attributed its increase in revenue due to strength in high-performance computing and automotive-related demand. In the earnings release, Chief Financial Officer Wendell Huang said: "Moving into third quarter 2021, we expect our business to be supported by strong demand for our industry-leading 5-nanometer and 7-nanometer technologies, driven by all four growth platforms, which are smartphone, HPC, IoT (Internet of Things) and automotive-related applications."

One of the reasons that Taiwan Semiconductor was able to displace Intel (INTC  ) as the leading semiconductor company as it was the first to develop 5nm and 7nm chips. In Q2, 5nm chips accounted for 18% of revenue, while 7nm chips accounted for 31% of revenue.

In terms of sales and earnings, Taiwan Semiconductor's results were quite strong, so its weakness is related to lower than expected margins in Q2 and lower guidance for gross margins. Gross margins in Q2 came in at 50% below expectations of 51%. The company also expects 50% gross margins in Q3.

Stock Price Outlook

Taiwan Semiconductor is expected to get a boost from sales of the iPhone 13 (AAPL  ) over the next couple of quarters as it produces many different chips used in the phone. The company is also aggressively investing in capacity to help reduce the chip crunch.

In terms of its stock, Taiwan Semiconductor is a high-quality, leading company. It remains favorably valued with a forward price to earnings ratio of 24 which is cheaper than the S&P 500 (SPY  ). Investors should keep the stock on their radar and use weakness to accumulate.