Taiwan Semiconductor Manufacturing Company (TSMC), widely recognized as the global leader in semiconductor contract manufacturing, has seen its stock rise by an impressive 75% year to date in 2024. This growth has been driven by the AI infrastructure boom, as tech giants like Nvidia and Apple rely on TSMC’s cutting-edge technology to meet their ever-increasing demand for advanced chips.
Despite this robust performance, investors are now asking: Is TSMC stock still a buy? Let’s dive into the reasons behind TSMC’s dominance in the semiconductor industry, explore its potential risks, and determine whether it remains a compelling investment opportunity.
Riding the Wave of AI Infrastructure Expansion
TSMC is the world’s largest contract semiconductor manufacturer, commanding over 60% of the market share. Its clients include industry heavyweights like Nvidia, Apple, and AMD, making it a key player in the AI revolution. Manufacturing chips is a capital-intensive process, requiring advanced foundries and high utilization rates to remain profitable. TSMC has consistently maintained a wide moat in this space, thanks to its scale, innovation, and technological edge.
Key Factors Driving TSMC’s Growth:
- AI Chips and Nvidia: TSMC is the primary manufacturer of Nvidia’s graphics processing units (GPUs), which are in relentless demand due to the widespread adoption of artificial intelligence. The company is scaling its manufacturing capabilities to support Nvidia’s ambitious goals.
- Apple’s Exclusive Partnership: Apple, TSMC’s largest client, has already booked all of TSMC’s next-generation 2nm technology for its upcoming chip designs. Meanwhile, TSMC is ramping up its production of 3nm technology, which even Intel has adopted for its own products.
- Pricing Power: Thanks to its dominant position and customer success, TSMC has demonstrated strong pricing power. According to Morgan Stanley, the company plans to increase prices by up to 10% in 2025 for AI semiconductors and advanced products like chip-on-wafer-on-substrate technology.
- Improving Margins: TSMC’s gross margins have surged from 43.4% two years ago to 57.8% last quarter, showcasing its ability to turn revenue into profit effectively. Higher gross margins also indicate stronger pricing power and operational efficiency.
Why TSMC Stands Out Among Competitors:
While TSMC is thriving, its competitors are struggling:
- Intel’s foundry business has faced significant challenges, including operational losses and declining revenue.
- Samsung’s foundry division has been plagued by unstable yields and the loss of key customers.
These issues have allowed TSMC to solidify its leadership position, particularly in the AI semiconductor market.
Risks to Taiwan Semiconductor’s Business
Despite its strong growth trajectory, TSMC is not without risks. Investors should carefully consider the following challenges:
1. Dependency on AI Demand
While TSMC is currently benefiting from surging AI infrastructure spending, this demand may eventually slow. As AI models mature, the need for exponentially higher computing power could diminish, potentially impacting TSMC’s revenue and margins. The company’s profitability depends heavily on maintaining high utilization rates in its foundries.
2. Geopolitical Risks
TSMC’s location in Taiwan adds an element of geopolitical uncertainty. Taiwan is a disputed territory claimed by China, and this has raised concerns about potential disruptions to TSMC’s operations. Additionally, U.S.-Taiwan relations could become strained under a new U.S. administration, further complicating matters. For example, President-elect Donald Trump has criticized Taiwan’s dominance in the U.S. chip industry and suggested the island should fund its own defense.
3. Competitive Landscape
Although TSMC currently holds a commanding lead, competition from Intel and Samsung could intensify if these companies overcome their operational challenges. Any advancements in alternative chip manufacturing technologies could also pose a threat to TSMC’s market share.
Is TSMC Stock Still a Buy?
Despite these risks, TSMC remains well-positioned to capitalize on the AI infrastructure boom and potential smartphone and PC upgrade cycles. The demand for semiconductors used in large language models (LLMs) and data centers is still in its early stages, providing a long runway for growth.
Valuation Highlights:
- TSMC trades at a forward price-to-earnings (P/E) ratio under 21 based on analysts’ 2025 estimates.
- The stock’s price/earnings-to-growth (PEG) ratio stands just above 1, making it an attractive option for growth-focused investors. PEG ratios under 1 are typically considered undervalued.
From a valuation perspective, TSMC offers a compelling combination of growth potential and reasonable pricing, especially given its leadership in AI semiconductor manufacturing.
A Solid Long-Term Investment
Taiwan Semiconductor continues to demonstrate its dominance in the semiconductor industry, thanks to its technological edge, strong client relationships, and ability to capitalize on the AI infrastructure boom. While risks like geopolitical tensions and dependency on AI demand remain, the company’s leadership position and robust pricing power make it a solid investment for long-term growth.
For investors looking to gain exposure to the AI and semiconductor sectors, TSMC’s current valuation offers an attractive entry point. As AI spending ramps up and next-generation technologies like 2nm chips gain traction, TSMC’s growth story is far from over.