Taiwan Semiconductor's Breakout Momentum in the AI Era: Strategic Positioning and Valuation Amid Surging Demand for Advanced Chips

The semiconductor industry is undergoing a seismic shift, driven by the exponential growth of artificial intelligence (AI). At the center of this transformation is Taiwan Semiconductor Manufacturing Company (TSMC), the world's largest contract chipmaker, which is leveraging its technological prowess and strategic foresight to dominate the AI-driven chip demand surge. With AI-related revenue surpassing $10 billion in Q2 2025 and a market capitalization now exceeding $1 trillion, TSMC's trajectory reflects not just a company capitalizing on a trend but a firm redefining the global semiconductor landscape.

Strategic Positioning: A Cornerstone of Dominance

TSMC's strategic positioning is underpinned by three pillars: technological leadership, market share dominance, and geopolitical agility.

1. Technological Leadership: TSMC's advanced manufacturing capabilities—particularly its sub-7-nanometer chips—account for 74% of its wafer revenue. These chips are critical for AI workloads, which demand high computational power and energy efficiency. The company's high-performance computing (HPC) division, encompassing AI and 5G, now contributes 60% of total revenue, signaling a structural shift toward high-margin, high-growth segments.

2. Market Share Dominance: TSMC commands approximately two-thirds of the global foundry market, a position fortified by its ability to secure long-term contracts with AI leaders such as NVIDIA and AMD. Analysts project its AI revenue could reach $90 billion by 2029, a figure that underscores its entrenched role in the AI ecosystem.

3. Geopolitical Agility: The U.S. tax incentives under President Trump's “Big Beautiful Bill” have reshaped TSMC's cost structure. By raising tax credits for semiconductor projects from 25% to 35%, the legislation has incentivized TSMC to accelerate its $165 billion U.S. investment plan. Additionally, potential exemptions from Trump's 100% tariff on semiconductor imports further reduce risks, allowing TSMC to hedge against geopolitical volatility while expanding its North American footprint.

Valuation Metrics: A Compelling Case for Undervaluation

Despite its dominance, TSMC's valuation remains remarkably attractive. Its trailing twelve-month (TTM) Price-to-Earnings (P/E) ratio of 21.2x is significantly lower than the peer average of 53.7x and the U.S. semiconductor industry average of 33.7x. This suggests the market is underappreciating TSMC's growth potential, particularly as AI demand accelerates.

The company's enterprise value-to-revenue (P/S) ratio of 8.5x also highlights its value proposition. For context, ASML, another semiconductor giant, trades at a P/S ratio of 15x. Given TSMC's superior margins and recurring revenue model, its valuation appears poised for re-rating as AI adoption scales.

U.S. Tax Incentives: A Tailwind for Cost Efficiency

The impact of U.S. tax incentives on TSMC's cost structure cannot be overstated. The 35% tax credit for advanced manufacturing projects directly reduces capital expenditures, while the tariff exemption shields the company from potential margin compression. These incentives align with TSMC's strategy to localize production in high-demand regions, mitigating supply chain risks and enhancing customer proximity.

However, challenges persist. U.S. manufacturing costs remain higher than in Asia, and supply chain gaps for materials like rare earth metals could strain operations. Yet, TSMC's scale and financial flexibility—evidenced by its 61% year-on-year net income growth—position it to navigate these hurdles.

Conclusion: A Buy for the Long-Term Investor

TSMC's breakout momentum in the AI era is not a fleeting phenomenon but a result of its unparalleled strategic positioning, attractive valuation, and alignment with macroeconomic tailwinds. As AI demand surges and U.S. policy frameworks favor domestic chip production, TSMC is uniquely positioned to capture incremental market share while delivering robust returns. For investors, the combination of undervaluation relative to peers and a clear path to $90 billion in AI revenue by 2029 makes TSMC a compelling long-term holding.