Taiwan Semiconductor: A Chip Off the Old Block?

Taiwan Semiconductor Manufacturing (TSMC) has been making waves in the tech industry, and investors are wondering if now is the right time to buy its stock. With the demand for AI chips skyrocketing and TSMC's leading position in manufacturing, the company seems poised for success. However, geopolitical risks and increased competition pose potential challenges. Let's delve into the factors driving TSMC's growth and consider the risks before deciding whether to buy now.

TSMC's technological edge and customer demand for advanced chips have been driving its earnings growth. The company's 3nm technology, which enhances chip speed, efficiency, and computational power, is highly sought after by customers. The market for 3nm chips is forecast to reach $26.5 billion by 2032, indicating strong demand for TSMC's products. In Q3 2024, TSMC's revenue surged 36% year-over-year to $23.5 billion, with AI-related demand being a key driver.

Moreover, TSMC's market dominance in advanced chip manufacturing has been a significant competitive advantage. As of 2024, the company holds an estimated 90% share of the market for leading-edge logic chips. This strong position has allowed TSMC to maintain high pricing power and enjoy robust capacity utilization.

However, geopolitical risks pose both challenges and opportunities for TSMC. Taiwan's political status, disputed by China, and U.S.-China relations create uncertainty. TSMC's global supply chain, crucial for AI and 5G technologies, could be disrupted by geopolitical instability. Yet, TSMC's strategic importance to both nations' technological advancements may buffer political tensions. Its strong U.S.-Taiwan relations and CHIPS Act incentives might bolster TSMC's U.S. presence, securing long-term prospects.



Increased competition from Samsung and Intel could potentially impact TSMC's pricing power and market dominance. If Samsung and Intel can stabilize their operations and increase their market share, they could challenge TSMC's pricing power. However, TSMC's strong position, technological edge, and success with customers like Apple and Nvidia may help it maintain its dominance.

Despite these potential risks, TSMC's valuation remains attractive. The stock has been on a strong run this year, up about 75% year to date, benefiting from the AI infrastructure buildout. TSMC's leading position in semiconductor manufacturing, with a commanding 60% market share, is underpinned by its scale and technological edge. Its customers, such as Apple and Nvidia, are thriving, driving demand for TSMC's advanced chip technology. The company's robust pricing power and high capacity utilization have led to a significant improvement in gross margin, up from 43.4% two years ago to 57.8% in the last quarter. Despite risks like potential AI spending slowdown and geopolitical tensions, TSMC's valuation remains attractive, with a forward P/E ratio under 21 and a PEG ratio of just over 1, indicating undervaluation.



In conclusion, TSMC's leadership in 3nm technology and customer demand for advanced chips drive its earnings growth and competitive advantage. While geopolitical risks and increased competition pose potential challenges, the company's strong market position and attractive valuation make it an attractive investment opportunity. Investors should carefully monitor the evolving market dynamics and geopolitical landscape before deciding whether to buy TSMC stock now.