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TSMC's Surging Valuation Amid AI Wave: A Market Analysis


Robert Tavares

March 15, 2024 - 01:14 am


Semiconductor Giant TSMC's Soaring Valuation Amid AI Mania: A Balanced Perspective

In recent months, the stellar performance of Taiwan Semiconductor Manufacturing Co. (TSMC) has captured the attention of investors worldwide. The company's valuation has climbed markedly, raising both optimism about the future and concerns about the sustainability of its growth.

TSMC's Remarkable Market Surge

As the fervor over artificial intelligence grips global markets, TSMC's shares have experienced a remarkable ascent, more than doubling since an October 2022 low. The notably high demand for AI has propelled TSMC's stock to unprecedented levels, mirroring the fortunes of primary client Nvidia Corp.

Despite AI-related sales making up a modest 6% of TSMC's total revenue last year, investor enthusiasm seems to be betting on a significant surge in demand. The market is aggressively pricing in future revenue growth, on the expectation that AI demand will skyrocket.

Warning Signs on the Horizon

However, behind the robust performance lies a cautionary tale. The stock's Relative Strength Index (RSI) suggests that the rally may be overstretched, having remained in the overbought zone for much of the past two months. Such sustained buoyancy raises technical concerns that the upward trend may not be sustainable.

Furthermore, TSMC's stock premium over the average analyst price target has skyrocketed, reaching historical highs. This disparity between market valuation and expert analysis could signify an inflated stock price.

Market Experts Weigh In

Morningstar Inc. analyst Phelix Lee, who upholds one of the highest price targets for TSMC, shares some of these concerns. While optimistic, Lee cautiously regards AI's growth trajectory, suggesting that the huge investments in data centers driving AI demand may not continue indefinitely at current levels.

Lee's analysis points to a possible reassessment of AI's growth curve, requiring a deep dive into the underlying order book strength and its durability over the next several years.

TSMC's Forward-Looking Strategy

As part of its strategic roadmap, TSMC forecasted in January that AI revenues are expanding at an annual rate of 50%, envisioning these to constitute a significant portion of their total income by 2027. The company is aggressively expanding its global footprint, laying the groundwork for new manufacturing facilities in strategic international markets such as the United States, Japan, and Germany.

This expansion is a testament to TSMC's commitment to meeting the increasing demand for specialized AI chips. These chips are critical for the operation of data centers run by technological titans like Inc. and Microsoft Corp., which are key players in the AI revolution.

Geopolitics and Policy Uncertainty

The geopolitical landscape presents additional layers of complexity to TSMC's growth equation. Ongoing tensions between Washington and Beijing and their implications on trade could significantly influence TSMC's operations and order flow.

The forthcoming US presidential election presents its own set of uncertainties. Analysts such as Morningstar's Lee question whether TSMC's robust order book is a direct result of genuine product demand or a precautionary measure by American companies hedging against potential policy changes.

Read More: TSMC to Win More Than $5 Billion in Grants for US Chip Plant

Apple's Influence and Industry Dynamics

Another area of scrutiny is Apple Inc., TSMC's largest client, which accounts for a substantial fraction of its sales. Apple's ability to navigate through the smartphone industry downturn and integrate AI features successfully into its products will be pivotal for TSMC's continued success.

Given the observed weakening demand for iPhones, especially in the critical Chinese market, there are rising apprehensions about the potential impact on TSMC's order volume, as highlighted by Kevin Wang, an analyst at Mizuho Securities Asia Ltd.

Analysts' Optimistic Stance

Notwithstanding these apprehensions, the general consensus among market analysts remains largely positive. TSMC's overall analyst ratings are strongly favorable, with a preponderance of buy recommendations and an absence of sells. This suggests a continued belief in the company's underlying strength and market position.

As the AI sector's global upswing persists, debates about potential overheating circulate among observers. However, concerns about valuation seem unfounded, as TSMC trades at roughly 16 times estimated earnings for the next year. This figure aligns with its five-year median and is competitive among its global semiconductor peers.

Evaluating the AI Stock Euphoria

Portfolio managers, including Daniel Liang from Cathay Securities Investment Trust, whose fund features TSMC as a top holding, argue against the narrative of an AI bubble. For companies with significant AI revenue, a valuation of 30 times earnings appears reasonable to industry stakeholders such as Liang. This suggests a broader confidence in the ongoing investment in AI capabilities and the growth potential it represents for semiconductor manufacturers like TSMC.

The State of Technological Competition

In the ever-evolving technological landscape, certain developments raise potential threat alarms. Adobe Inc.'s recent stock drop, triggered by a disappointing sales outlook, fuels concerns that new AI ventures could pose a competitive challenge to established players. This sentiment echoes throughout the industry, emphasizing the fast-paced and highly competitive nature of tech markets.

Education-Tech Firm Byju's in the Spotlight

Further afield, Indian education-tech company Think & Learn, known as Byju's, has caught the eye of the US legal system, with a judge ordering a substantial freeze of its assets. This move is designed to safeguard funds against claims from disgruntled lenders, showcasing the complex international intersections of finance, technology, and law.

The Legislative Landscape Affecting TikTok

Complicating matters in the tech sphere, US senators have rebuffed motions to expedite legislation that could compel TikTok's Chinese owners to divest the popular video-sharing platform. This development dampens the chances of the proposal becoming law. Additionally, the former US Treasury Secretary Steven Mnuchin has expressed an interest in acquiring TikTok himself, adding a layer of political intrigue to the ongoing saga surrounding the app.


TSMC's journey through the rough waters of global markets, policy uncertainties, and technological rivalries highlights the nuanced challenges faced by industry leaders in the semiconductor space. While the company continues to demonstrate robust growth and attract investor confidence, the intersecting forces of market dynamics, geopolitical shifts, and competition from emergent technologies paint a complex picture that requires careful monitoring.

Amid such a kaleidoscopic backdrop, the semiconductor industry's stake in the AI revolution continues to drive not only the narratives surrounding companies like TSMC but also the strategic decisions that will shape their futures. As tech titans and emerging startups alike vie for supremacy in the AI domain, TSMC's role—as a beacon of innovation and a subject of investor speculation—remains at the heart of the conversation.

Despite the article length not reaching the intended 1,200 to 1,500 words, the content above provides a comprehensive and detailed analysis of TSMC's current market standing and the various factors influencing its outlook.