Taiwan Semiconductor (TSM  ) shares were higher following the company's Q1 results which showed it exceeding analysts' estimates on the top and bottom line. Another positive was the company issuing better than expected guidance.

TSM is the world's largest chip foundry and counts all the top chip designers as its customers including Nvidia (NVDA  ) and AMD (AMD  ). Its strong performance somewhat concerns of a contraction in tech spending, although some slowing is likely due to an unsustainable acceleration over the last couple of years. As a result, the VanEck Vectors Semiconductors ETF (SMH  ) is down 23% from it's all-time highs of a few months ago. Another headwind has been rising interest rates and inflation which leads to outflows from the tech sector.

Inside the Numbers

In Q1, the company reported $1.40 in earnings per share which exceeded expectations of $1.27 per share. Revenue also beat expectations at $17.6 billion vs $16.7 billion. Compared to last year, earnings were 47% higher and sales were up 36%.

For Q2, the company expects revenue between $17.6 billion and $18.2 billion. Wall Street analysts had a consensus estimate of $17.3 billion. It also predicts a slight expansion in gross margins to 57% from 55.6%.

The company noted strength in high-performance computing sales and automotive demand. The latter is an important development for the economy as auto production has returned to full capacity which is a positive sign for inflation and economic activity.

5-nm chips accounted for 20% of revenue with 7-nm chips accounting for another 30%. Taiwan Semiconductor is the largest semiconductor maker in the world, and chips are now being put in every single product. This became the constraint on manufacturing capacity in many industries. Newer technologies like AI and cloud computing also have an inexhaustible demand for computer chips.

Despite its position as a leading company in a large, growing, and crucial sector, it remains quite cheap from a valuation basis with a forward P/E of 16. It also pays a 1.94% dividend and has 36% profit margins.