Is TSMC Still Undervalued Amid AI-Driven Growth and Valuation Divergence?

The question of whether TSMC remains undervalued in the AI era hinges on a stark divergence between traditional valuation metrics and forward-looking growth expectations. While the company's current price-to-earnings (PE) ratio of 23.26x appears attractively low relative to its historical fair ratio and the broader semiconductor industry average of 68.81x, according to SimplyWall St, a Discounted Cash Flow (DCF) analysis suggests the stock is 29% overvalued, with an estimated intrinsic value of NT$223.03 per share according to the same analysis. This contradiction underscores the tension between discounted cash flow models, which prioritize near-term cash generation, and growth-centric narratives, which bet on AI-driven revenue acceleration.

Valuation Models: A Tale of Two Approaches

TSMC's valuation puzzle begins with its PE ratio. At 23.26x, the multiple is significantly below its calculated fair ratio of 37.61x and the industry benchmark according to SimplyWall St. This discrepancy suggests the market may be underappreciating the company's long-term prospects, particularly given its dominant role in advanced node manufacturing (74% of wafer revenue in Q3 2025 came from advanced processes) according to Seeking Alpha. Morningstar's recent revision of its fair value estimate to $310 per ADR share-up from prior levels-further reinforces this view, citing TSMC's "wide economic moat" and insatiable AI demand according to Morningstar.

Yet DCF models tell a different story. The same analysis that highlights an undervalued PE arrives at an intrinsic value far below the current share price, implying overvaluation. This divergence likely reflects differing assumptions about the timing and magnitude of AI-driven cash flow. DCF models typically discount future earnings at a conservative rate, which may not fully capture the explosive growth potential of AI applications in high-performance computing (HPC) and smartphones-a sector TSMC expects to ramp sharply in 2026 according to TechSoda.

AI as the Growth Catalyst

TSMC's optimism about AI is not unfounded. Q3 2025 revenue surged 40.8% year-over-year to $33.1 billion, driven by demand for advanced chip processing technologies. The company has since raised its full-year revenue growth forecast to the mid-30% range, with 2026 expected to see an even faster acceleration as it scales production of its N2 process node family according to TechSoda. These advancements are underpinned by a $40–42 billion capital expenditure plan for 2025, 70% of which is earmarked for advanced process technologies according to TechSoda.

The U.S. market, in particular, has become a focal point. TSMC's Arizona expansion-part of a broader $40 billion U.S. investment-positions it to capitalize on domestic AI demand, where leading-edge semiconductors are critical for data centers and autonomous systems according to Manufacturing Dive. This strategic pivot not only diversifies TSMC's geographic risk but also aligns with global trends toward localized chip production, enhancing its long-term competitive positioning.

Reconciling the Divergence

The key to resolving TSMC's valuation debate lies in reconciling short-term cash flow realities with long-term growth potential. While its DCF-derived overvaluation raises caution, the company's 45.7% net margin in Q3 2025 and robust balance sheet suggest it has the financial flexibility to reinvest in growth without compromising stability. Moreover, the semiconductor industry's cyclical nature means current multiples may not yet reflect the full impact of AI adoption, which is still in its early stages.

Morningstar's $310 fair value estimate, for instance, assumes a gradual but sustained ramp in AI demand-a trajectory supported by TSMC's client diversification and technological leadership according to Morningstar. If AI adoption accelerates faster than modeled, the stock's current price could prove to be a bargain. Conversely, if demand softens or capital expenditures outpace returns, the DCF overvaluation thesis would gain traction.

Conclusion: A Stock at the Crossroads

TSMC's valuation remains a contentious topic, split between the prudence of DCF analysis and the exuberance of growth expectations. For investors, the decision to buy, hold, or sell hinges on their confidence in AI's trajectory. The company's financials-strong margins, aggressive capex, and strategic U.S. investments-bolster the case for long-term optimism. However, those prioritizing near-term value may find the DCF discount compelling.

In the end, TSMC's story is one of transformation. As AI reshapes global technology demand, the chipmaker's ability to scale advanced processes while maintaining profitability will determine whether its valuation gap narrows in favor of growth-or corrects to reflect more conservative cash flow assumptions.