Taiwan Semiconductor Manufacturing Company (TSM), popularly referred to as TSMC, has seen its stock perform extraordinarily well over the past year. TSM shares have been riding the wave of artificial intelligence (AI) optimism and seemingly unshackling themselves from geopolitical concerns. However, I personally find geopolitical risk can be hard to quantify. I’m starting to wonder how much more upside potential this company has. That’s why I’m neutral on TSM stock.
TSMC’s Technological Leadership
TSMC is a global leader in semiconductor foundry services, consistently pushing the boundaries of semiconductor technology and maintaining a competitive edge in the industry. The company has continually invested in smaller and more efficient nodes. Nodes refer to the process technology used to create integrated circuits. Smaller nodes (measured in nanometers) allow more transistors to be packed into a chip, improving performance and energy efficiency.
The N2 and A16 processes are reflective of this technological primacy. The N2 process, set for volume production in the second half of 2025, will deliver impressive performance gains and better-than-expected wafer yields than its predecessor, N3. This new node promises 10-15% better performance than the N3 or 25-30% lower power consumption at the same speed as N3E. Moreover, the N2P variant offers further enhancements for high-performance computing and smartphone chips.
Meanwhile, TSMC’s A16 process (1.6nm) will incorporate innovative features like the Superpower Rail (SPR), a backside chip power delivery system that improves logic and transistor density. Scheduled for volume production in late 2026, A16 is expected to deliver 8-10% higher speeds or 15-20% lower power consumption than N2P, as well as increased chip density.
TSMC’s Perennial Geopolitical Issues
Unfortunately, geopolitical concerns often mitigate some of the company’s technological superiority. China’s aggressive stance towards Taiwan, including military exercises and air incursions, has raised concerns about potential disruptions to TSMC’s operations.
China’s military has simulated blockades of Taiwan, highlighting its possible intent and ability to potentially isolate the island at some future point. This would likely be a precursor to a potential invasion or forced reunification attempt. Moreover, any blockade or unification attempt could severely impact the global technology industry, overall.
These geopolitical risks create investor uncertainty and often affects TSM stock negatively. The company’s critical role in the global tech ecosystem makes it particularly vulnerable to shifts in China-Taiwan relations.
Donald Trump and TSM Stock Risk
These geopolitical concerns have been multiplied by presidential candidate Donald Trump’s recent comments suggesting Taiwan should pay for U.S. protection. That has raised concerns about the future of U.S.-Taiwan relations, especially should Trump win the U.S. Election in November. It may result in many investors taking a cautious view towards TSM shares, including myself.
“Taiwan should pay us for defense. You know, we’re no different than an insurance company. Taiwan doesn’t give us anything,” Trump said in July. He also criticized Taiwan’s semiconductor industry, saying, “They took all of our [semiconductor] chip business. How stupid are we?“
These remarks highlight Trump’s transactional approach to foreign policy as well as the potential challenges the country and TSMC may face if Trump is reelected. At the time of writing, the majority of polls suggest that Trump trails the Democratic nominee Kamala Harris by a small margin.
Collectively, these issues have driven Taiwan Semi’s desire to invest beyond the small island nation. While it is building foundries outside of Taiwan, the company undoubtedly still suffers from a great deal of concentration risk.
TSM Stock Valuation
Despite the geopolitical pressure, TSM shares have surged over the past 18 months. Sadly, I was an investor who lost conviction after legendary stock picker Warren Buffett sold his position in 2022, citing geopolitical concerns.
However, the stock’s current price-to-earnings (P/E) ratio of 27.6x is greater than its five-year average of 22x. Currently, analysts expect the company to grow earnings at a CAGR rate of 26.5% over the medium term. In turn, this leads us to a price-to-earnings-to-growth (PEG) ratio of 1.04. This certainly isn’t expensive for the semiconductor and information technology sector. In fact, this PEG ratio represents a 45% discount to the information technology sector.
However, my take on this valuation depends on how geopolitical risk is assessed, relative to Taiwan Semi’s growth prospects. Because in all likelihood, the chance of a Chinese invasion isn’t baked into growth forecasts.
Is TSM Stock a Buy According to Analysts?
On TipRanks, TSM stock comes in as a Strong Buy based on five Buys, zero Holds, and zero Sell ratings assigned by analysts in the past three months. The average TSM stock price target is $205, implying about 12% potential upside.
The Bottom Line on Taiwan Semiconductor (TSMC)
TSM stock is undervalued according to analysts, and valuation metrics suggest that the company is good value compared with its peers in the information technology sector. However, I personally find it hard to overlook the geopolitical risks at play here. Those concerns carry additional significantly with TSM shares trading at higher multiples than they have over the past five years. Predicting geopolitical events is often a fool’s game, but I’d simply rather not participate in the stock here.
