Taiwan Semiconductor: Riding the AI Wave with CoWoS and Strategic Onshoring

The semiconductor industry's next frontier is here, and Taiwan Semiconductor Manufacturing Company (TSM) stands at its center. Goldman Sachs' recent elevation of TSM to its “Conviction Buy” list—citing a 29% revenue growth forecast for 2025—underscores the company's unique position to capitalize on the AI revolution, advanced packaging dominance, and strategic onshoring. With CoWoS (chip-on-wafer-on-substrate) technology fueling demand and a valuation that lags its growth trajectory, TSM offers a compelling investment thesis. Here's why investors should take notice.

The AI-Driven Catalyst: CoWoS and Beyond

TSM's CoWoS packaging is the unsung hero of the AI boom. This technology allows chip designers to stack memory, processors, and other components on a single substrate, enabling higher performance and efficiency. Goldman Sachs estimates CoWoS shipments will surge to 664,000 wafers in 2025, 1.08 million in 2026, and 1.566 million by 2027—growth driven not just by AI but by expanding demand in high-performance computing (HPC), networking, and even smartphone applications.

NVIDIA's H100 and H800 AI processors, which underpin data center AI workloads, rely heavily on CoWoS. But TSM's advantage isn't confined to one customer: smartphone giants like Apple and Samsung, along with cloud infrastructure providers, are adopting CoWoS for chiplet-based designs. This diversification reduces reliance on a single sector, making TSM's growth more sustainable.

Valuation: Undervalued for a Growth Engine

Despite its pivotal role, TSM trades at a P/E ratio of 20.2—modest compared to peers like Intel (P/E ~28) and ASML (P/E ~25). Analysts argue this reflects lingering macroeconomic concerns, not TSM's fundamentals. The company's gross margin of 57.4% (among the highest in the industry) and its ability to raise prices on advanced nodes (due to supply constraints) further bolster its profit resilience.

Goldman's NT$1,210 price target implies a 15% upside from current levels, with upside risks if AI demand exceeds forecasts. The firm also highlights TSM's valuation relative to its 3nm and 5nm revenue streams, which now account for 40% of total wafer revenue—a figure set to rise as advanced nodes dominate AI chip production.

Onshoring: Securing the U.S. Supply Chain

TSM's $165 billion investment in Arizona—its largest single foreign investment ever—positions it as the linchpin of U.S. semiconductor self-reliance. By 2028, three fabs in Phoenix will produce 4nm, 3nm, and potentially 2nm chips, supporting AI, 5G, and HPC applications. This isn't just about manufacturing: TSM has forged partnerships with Amkor Technology for advanced packaging and 14 direct suppliers to build a localized ecosystem.

The strategic benefits are twofold. First, U.S. customers like NVIDIA and AMD gain access to domestic capacity, reducing geopolitical risks. Second, TSM's Arizona operations benefit from federal subsidies under the CHIPS Act, including $6.6 billion in direct funding and tax incentives. This “onshoring” plays directly into U.S. tech policy, ensuring TSM's role as a trusted partner for AI and defense innovation.

Energy Infrastructure: Greening the Semiconductor Supply Chain

TSM's commitment to sustainability isn't just a PR move—it's a competitive advantage. The company aims for 100% renewable energy (RE100) by 2040, with 14.5 MW of solar panels already operational in Arizona. By requiring suppliers to adopt Science-Based Targets (SBTs) and offering subsidies for carbon-reduction upgrades, TSM is decoupling growth from environmental costs.

This approach addresses two risks: regulatory scrutiny of energy-intensive manufacturing and rising ESG investor demands. TSM's net-zero roadmap—peaking emissions by 2025 and achieving carbon neutrality by 2050—aligns it with global climate goals, reducing long-term operational risks.

Risks to Consider

• Supply Chain Volatility: Overestimating AI adoption could lead to excess capacity in CoWoS or advanced nodes.
• Geopolitical Tensions: U.S.-China trade disputes or Taiwan's political stability could disrupt operations.
• Competition: Intel's 20A/18A process and Samsung's advanced packaging efforts may erode TSM's margins.

Conclusion: A Buy at This Valuation

TSM combines AI-era tailwinds, a fortress balance sheet, and strategic foresight in onshoring and sustainability. With CoWoS demand diversifying, U.S. partnerships solidifying, and a P/E ratio that doesn't yet reflect its growth, now is the time to buy.

Investment Thesis:
- Price Target: Goldman's NT$1,210 suggests a 15% upside, but upside risks exist if CoWoS adoption accelerates.
- Hold for: 1–3 years, as AI adoption and U.S. fab ramp-up materialize.
- Risk Management: Use trailing stops to protect gains amid macro uncertainty.

TSM isn't just a semiconductor manufacturer—it's a linchpin of the AI economy. For investors willing to look past near-term volatility, this is a generational opportunity.