TSMC: The Undervalued Infrastructure Monopoly Powering the AI Revolution

In the race to power the artificial intelligence (AI) revolution, one company stands at the epicenter of global semiconductor manufacturing: Taiwan Semiconductor Manufacturing Co. (TSMC). While investors often focus on TSMC's dominant foundry business, a deeper analysis reveals two structural advantages-depreciation cliffs and CoWoS scarcity-that are driving margin expansion and pricing power, yet remain underappreciated in current valuations. These factors position TSMC not just as a supplier, but as an infrastructure monopoly in the AI era.

Depreciation Cliffs: A Hidden Tailwind for Margins

TSMC's financial performance has long been shaped by the cyclical nature of capital expenditures in semiconductor manufacturing. However, a structural shift is now emerging. Equipment purchased for 5-nanometer and 4-nanometer fabrication in 2020 and 2021 has completed its five-year accounting depreciation life, leading to a sharp decline in depreciation expenses. Data from TSMC's 2024 Annual Report indicates that the depreciation-to-revenue ratio fell from 24.6% in 2023 to 22.9% in 2024, with guidance projecting further declines to 18.6% in 2025 and 17.2% in 2026.

This "depreciation cliff" has unlocked significant cost savings. Annual savings of approximately $9.4 billion-equivalent to 8 percentage points of revenue transitioning from expense to gross profit-have directly boosted TSMC's margins. For context, TSMC's gross margin expanded to 55.6% in Q3 2024, a level not seen since 2021. The company is now generating revenue from fully depreciated equipment while charging higher prices, a dynamic that is unlikely to reverse in the near term. Yet, these margin gains are often dismissed as temporary, underestimating the long-term structural benefits of a mature capital base.

CoWoS Scarcity: The New Bottleneck in AI Infrastructure

While depreciation cliffs are a financial tailwind, TSMC's Chip-on-Wafer-on-Substrate (CoWoS) technology represents a strategic moat in the AI era. CoWoS, a cutting-edge packaging solution, enables the integration of multiple chips into a single package, a critical requirement for high-performance computing (HPC) and AI applications. As of late 2024, TSMC's CoWoS capacity stood at 35,000 wafers per month, with plans to double this to 70,000 wpm by 2025 and reach 130,000 wpm by 2026.

This aggressive scaling has cemented TSMC's dominance in the advanced packaging market. The company now captures nearly 100% of the AI chip market, with NVIDIA alone securing over 60% of CoWoS capacity in 2025 and 2026. The scarcity of CoWoS has transformed it from a cost-plus commodity to a scarcity-priced bottleneck, with TSMC commanding margins approaching 80% in this segment.

Pricing power is further amplified by TSMC's 2025 price hikes. While 3nm and 5nm processes will see increases of 5–10%, CoWoS packaging is expected to rise by 15–20% due to demand outpacing supply. This pricing strategy reflects TSMC's ability to balance capacity constraints with the strategic value of its technology-a dynamic that mirrors the early days of Moore's Law, where scarcity drove innovation and pricing.

Structural Mispricing and the Investment Case

The market's underappreciation of these trends creates an opportunity. TSMC's foundry business is already valued at a premium, but its CoWoS division and depreciation-driven margin expansion are not fully priced in. For instance, TSMC's market share in the traditional foundry industry is projected to grow from 59% in 2023 to 66% in 2025, yet its broader influence in the "Foundry 2.0" model-encompassing packaging and testing-is even more significant.

Moreover, the depreciation cliff is a one-time benefit that will persist for years, while CoWoS scarcity is a self-reinforcing cycle: higher demand justifies higher prices, which fund further capacity expansion, which in turn deepens TSMC's lead. This flywheel effect is rarely replicated in capital-intensive industries, yet TSMC's stock trades at a multiple closer to a commodity producer than a technology monopoly.

Conclusion

TSMC's role in the AI revolution extends beyond manufacturing-it is the infrastructure that enables the next generation of computing. The depreciation cliff is a financial catalyst, while CoWoS scarcity is a strategic lock-in. Together, they create a durable competitive advantage that the market is underestimating. For investors seeking exposure to the AI boom, TSMC offers a unique combination of margin resilience, pricing power, and long-term growth. In an era where scarcity drives value, TSMC is not just a supplier; it is the bottleneck.