Taiwan Semiconductor reported a 57% YOY surge in net income and a nearly 40% revenue increase.
TSM creates chips that are the backbone of AI giant Nvidia and Apple iPhones and Macs.
TSM stock has an attractive valuation of 23.5x forward earnings, even when accounting for geopolitical risks.
Taiwan Semiconductor (TSM), the world’s largest and most advanced chipmaker, has once again showcased its critical role in powering the AI revolution. Reporting a stellar fourth quarter with a 38.8% year-over-year revenue increase and a 57% surge in net income, TSM’s results highlight the insatiable demand for its cutting-edge 3nm and 5nm chips. These chips are the backbone of AI giants like Nvidia (NVDA), whose GPUs dominate the market, and Apple (AAPL), which relies on TSMC to produce its A-series and M-series chips for iPhones and Macs.
As advanced technologies (3, 5 and 7 nanometer chips) accounted for a remarkable 74% of TSMC’s wafer revenue, the company’s leadership in innovation continues to solidify its position at the heart of AI and high-performance computing. With robust demand for AI-related applications offsetting seasonal smartphone declines, TSMC's pivotal role in shaping the future of technology has never been clearer.
Although Taiwan Semiconductor currently holds a Zacks Rank #4 (Sell), the company has delivered exceptional performance over the past year, reflecting strong investor interest in owning such a pivotal player in the tech industry. The low Zacks Rank primarily stems from minor downward revisions to earnings estimates, but this latest impressive earnings report could prompt analysts to revisit and potentially upgrade their forecasts.
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Taiwan Semiconductor AI, Geopolitics and New Chips
Taiwan Semiconductor continues to solidify its role as the backbone of the AI revolution, leveraging its advanced 3nm and 5nm technologies to power innovations for major clients like Nvidia, Apple, and many others. In Q4, High-Performance Computing (HPC), which includes AI and 5G applications, accounted for 53% of TSM’s revenue, a significant leap from 43% a year ago—driven by surging AI-related demand. TSM’s CEO, C.C. Wei, affirmed the company’s confidence in navigating geopolitical challenges, including the US export controls on AI chips, emphasizing open communication with both current and future administrations.
Despite these geopolitical hurdles, TSM is doubling down on its advanced manufacturing processes, which contributed 74% of total wafer revenue in Q4. With plans to ramp up production of its 3nm and upcoming 2nm nodes, the company is well-positioned to maintain its technological edge. These advancements are crucial not only for sustaining margin expansion but also for supporting high-demand applications like AI inference and training, critical for Nvidia’s GPUs and Apple’s custom silicon.
TSM is also taking steps to mitigate risks associated with geopolitical tensions, including expanding its overseas fabs in Arizona and Japan. This diversification strengthens its long-term growth prospects by reducing exposure to regional risks while addressing growing global demand. As the company projects up to $42 billion in capital expenditures for 2025, it reinforces its commitment to advancing AI technologies and maintaining its leadership in the semiconductor industry.
Taiwan Semiconductor Shares Trade at a Discount to Growth
Taiwan Semiconductor holds a critical position in the global technology supply chain. As the world's largest foundry, it is unparalleled in its ability to meet the modern world's semiconductor demands at scale. This unique and vital role underscores the company's significance in enabling technological advancements across industries.
Given its indispensable position, TSM appears to trade at an attractive valuation of 23.5x forward earnings, even when accounting for geopolitical risks. Additionally, with earnings per share expected to grow at an impressive annual rate of 31.2% over the next three to five years, the company boasts a PEG ratio of 0.75, signaling a discount relative to its growth potential.
Although TSM is currently trading above its five-year median valuation of 21.5x, the rapid expansion of the AI sector and the company's integral role in its development justify a premium.
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Should Investors Buy Shares in TSM?
Taiwan Semiconductor continues to solidify its position as a cornerstone of the semiconductor, AI, and broader technology industries. As the manufacturing partner for some of the most innovative and influential companies in the world, including Apple, Nvidia, and many others, TSM is uniquely positioned at the forefront of technological advancement.
However, potential investors should note that TSM currently holds a low Zacks Rank, reflecting recent downward revisions in earnings estimates. This could signal near-term headwinds or a cautious outlook from analysts despite the company’s strong fundamentals and growth prospects. For investors who like to stay on the right side of the Zacks Rank, it might be prudent to wait for signs of improving earnings revisions before initiating a position.
That said, TSM’s long-term growth trajectory appears intact, driven by its pivotal role in the AI boom and increasing global demand for advanced semiconductors. Investors with a longer time horizon and confidence in the company’s ability to overcome short-term challenges may see the current valuation as an opportunity to buy into one of the most critical players in modern technology. Patience and timing are key, and monitoring earnings revisions and broader market conditions will be essential for making an informed decision.
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