Why TSMC Remains a Compelling Buy Despite Recent Volatility: Structural Dominance in AI and Geopolitical Resilience

The semiconductor industry is at a pivotal juncture, driven by the exponential rise of artificial intelligence (AI). Against this backdrop, Taiwan Semiconductor Manufacturing Company (TSMC) has emerged as the linchpin of the AI revolution, its advanced chipmaking capabilities underpinning everything from data centers to consumer devices. While recent volatility—marked by a 17.7% month-over-month dip in June sales—has sparked investor caution, the fundamentals of TSMC's growth story remain unshaken. This article explores why TSMC remains a compelling buy, focusing on its structural advantages in AI-driven demand, geopolitical risk mitigation, and undervaluation relative to its growth trajectory.

1. AI-Driven Growth: TSMC's Unmatched Position in Advanced Nodes

TSMC's Q2 2025 results underscore its dominance in the AI supply chain. Revenue surged to NT$933.8 billion (US$31.9 billion), a 38.6% year-on-year increase, with advanced nodes (3nm to 7nm) accounting for 73% of wafer revenue. The 3nm node alone contributed 22% of sales, up from just 9% in Q1 2024, reflecting insatiable demand for chips powering AI training and inference.

The company's CEO, C.C. Wei, has emphasized that AI demand is “consistently outpacing supply”, with high-performance computing (HPC) revenue projected to grow at a 50% CAGR through 2028. This is no accident: TSMC's 3nm process offers 35% better performance and 30% higher power efficiency compared to 5nm nodes, making it indispensable for training large language models and deploying AI at scale.

Competitors like Samsung and SMIC are years behind in advanced node development. Samsung's 3nm yields lag, while SMIC faces U.S. sanctions, leaving TSMC with over 90% market share in nodes below 10nm. This leadership ensures pricing power: TSMC commands 53%+ gross margins, far exceeding industry averages.

2. Mitigating Geopolitical Risks Through Diversification

Despite U.S.-Taiwan tensions and potential tariffs, TSMC has methodically reduced geopolitical exposure. Its $100 billion global expansion plan includes U.S. facilities in Arizona (set to mass-produce 4nm chips by late 2025) and Japan (targeting 28nm for automotive chips). These investments not only serve as a hedge against trade disruptions but also deepen ties with key clients like NVIDIA and AMD, which rely on TSMC for exclusive access to leading-edge nodes.

Moreover, TSMC's customer lock-in is structural. Companies like NVIDIA, whose H100 GPUs are exclusively manufactured by TSMC, cannot easily pivot suppliers due to the cost and complexity of re-engineering chips. This relationship ensures stable demand, even amid macroeconomic headwinds.

3. Undervalued Relative to Growth Prospects

At a forward P/E of 16.37, TSMC trades at a significant discount to peers like NVIDIA (72.85) and AMD (42.5). This valuation gap is unjustified given TSMC's 20% revenue CAGR (USD) target through 2029 and its role as the only pure-play foundry capable of delivering 3nm/2nm chips at scale.

The June sales dip—driven by seasonal factors—was overshadowed by a 26.9% year-on-year increase in June revenue and a 40% first-half revenue surge. Management remains confident in its 24%–26% full-year growth guidance, reaffirming AI as the primary growth engine.

Investment Thesis: A Buy with Catalysts Ahead

The July 17 earnings call will be pivotal. Investors should watch for:
- Q3 guidance: Whether the June dip is a one-off or signals moderation.
- 2nm node updates: Tape-outs expected in Q3 could unlock new performance gains and margins.
- Geopolitical commentary: Progress on U.S. facilities and tariff mitigation strategies.

Bottom Line: TSMC's structural advantages—technological leadership in AI chips, diversified production, and irreplaceable client relationships—position it as a long-term winner. The June volatility is a buying opportunity in a stock primed to benefit from the AI supercycle. For investors with a multi-year horizon, TSMC remains a core holding in the semiconductor sector.

Recommendation: Hold or accumulate shares ahead of the July 17 earnings call. The risk/reward profile favors upside, particularly if AI demand and geopolitical resilience remain intact.