We came across a bullish thesis on Taiwan Semiconductor Manufacturing Company Limited (TSM) on Substack by Daan Rijnberk. In this article, we will summarize the bulls’ thesis on TSM. Taiwan Semiconductor Manufacturing Company Limited (TSM)’s share was trading at $177.10 as of March 7th. TSM’s trailing and forward P/E were 25.74 and 19.92 respectively according to Yahoo Finance.
A close-up of a state-of-the-art semiconductor wafer foundry.
Taiwan Semiconductor Manufacturing Company (TSMC) is facing a wave of investor pessimism despite its strong fundamentals, creating a prime buying opportunity for long-term investors. While headwinds such as export restrictions, geopolitical risks, and near-term demand fluctuations have weighed on sentiment, the company continues to execute flawlessly, maintaining dominance in the semiconductor manufacturing space. TSMC controls over 50% of global semiconductor production and an overwhelming 90% of the advanced node market, which includes chips below 7nm. Competitors like Samsung and Intel remain at least 2-4 years behind in process technology, making it practically impossible for them to catch up, especially given TSMC’s massive capital expenditures of roughly $30 billion to $40 billion annually.
The company is currently capacity-constrained for advanced nodes, with high demand from major clients like Apple, Nvidia, and AMD. This demand surge, driven by AI-related applications, positions TSMC for sustained long-term growth. Management has provided confident guidance, expecting a five-year revenue CAGR of approximately 20%, fueled by AI-related revenue growing at a mid-40s CAGR. Despite cyclical pressures, TSMC maintains an industry-leading margin profile, with an operating margin just shy of 50%, a net income margin of 43% in the latest quarter (which did not drop below 36% even at its lowest point), and a return on equity (ROE) of 30.3% in FY24, up 400 basis points, reaching 36.2% in Q4. The company also delivered a return on capital employed (ROCE) and return on invested capital (ROIC) in the mid-20s in 2024, with expectations of exceeding 30% in the coming years.
Despite these impressive fundamentals, TSMC shares trade at just 19x the FY25 Wall Street consensus earnings, a 12% discount to the semiconductor sector median. The company also trades at a price-to-earnings-to-growth (PEG) ratio below 1x, representing a 40% discount to the sector and signaling an undeniable bargain. Geopolitical risks, particularly U.S.-China tensions and potential tariffs, remain a primary concern for investors. However, direct exports to the U.S. account for less than 5% of TSMC’s total revenue, and while indirect exposure exists, the company has proactively stopped shipping nodes below 16nm to China, ensuring compliance with U.S. regulations. This approach significantly reduces regulatory risk and limits the impact of any future trade restrictions.
Additional concerns arose following a late-January earthquake in Taiwan, which temporarily halted production and led to a minor revenue impact of approximately $161 million. However, operations have since stabilized, and this remains a short-term issue rather than a fundamental problem. More significantly, TSMC recently announced a $100 billion investment over the next four years to expand its U.S. presence, including five new facilities. This move aligns with U.S. government efforts to reduce reliance on foreign chip manufacturing and strengthens TSMC’s relationship with key customers like Apple, Nvidia, and AMD, who prefer domestically produced chips. While concerns about margin dilution from these investments led to a temporary share price decline, the long-term benefits far outweigh the risks.
Given its dominant market position, resilient financials, and long-term growth trajectory, TSMC remains one of the best investment opportunities of the decade. The company boasts a pristine balance sheet with $74 billion in cash against total debt of just $30 billion. Net of CapEx, it generated $26.5 billion in free cash flow (FCF) in FY24, further reinforcing its financial strength. Using a reasonable long-term multiple of 25x earnings, TSMC’s fair value is estimated at $310 per share, reflecting a potential 20% annualized return (CAGR) and a total three-year upside of 72%. The current market discount presents a rare opportunity to accumulate shares in a world-class business with exceptional pricing power and unmatched technological leadership. As industry sentiment improves and TSMC continues to execute, a significant re-rating of the stock is likely, offering substantial upside for investors willing to look past short-term concerns.
Taiwan Semiconductor Manufacturing Company Limited (TSM) is on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 186 hedge fund portfolios held TSM at the end of the fourth quarter which was 158 in the previous quarter. While we acknowledge the risk and potential of TSM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TSM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.