Taiwan Semiconductor Manufacturing (TSM) stock surged through 2024, driven by tailwinds in artificial intelligence (AI). However, I believe the bull run may have pushed too far, with investors seemingly forgetting the geopolitical constraints that had previously held the stock back. Moreover, I’m bearish as emerging trends in technology could negatively impact product lifecycles and demand for TSMC’s services.
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TSMC Is Undeniably Winning
While I’m bearish on TSMC at the current price, it’s necessary to recognize that the company is a real winner in the semiconductor space, both in recent history and over the long run. Its market share of the pure-play foundry market is around 60%. Also, it has a 90% market share in advanced chip manufacturing due to its unparalleled technological leadership.
TSMC’s pure-play foundry model eliminates conflicts of interest faced by competitors like Intel (INTC) and Samsung (SSNLF), allowing it to prioritize client needs without internal competition. This customer-centric approach, combined with its massive manufacturing capacity, enables TSMC to fulfill large orders more efficiently than its rivals. In turn, this has led to unmatched economies of scale, which also contribute to its sizeable R&D expenditure and first-to-market approach.
The company’s commitment to innovation is evidenced by its scheduled mass production of 2nm chips in 2025 and ensures it stays ahead in the rapidly evolving semiconductor landscape. TSMC’s strategic position in the growing AI and high-performance computing markets further solidifies its competitive advantage, making it a crucial linchpin in the global electronics supply chain.
It’s Not Plain Sailing for TSMC
However, my bearishness on TSMC is colored by several risks, not geopolitical ones yet. The company faces subtle challenges in this industry. Firstly, the semiconductor market is traditionally quite cyclical, and we’ve now seen two years of significant growth. As such, we may see some sector-wide deceleration later in 2025.
Emerging technological trends suggest a fundamental shift in computational efficiency, with Chinese and Western tech innovators developing AI models that dramatically reduce hardware requirements. These resource-light AI approaches could extend the GPU lifecycle from traditional 3-4 year refresh cycles to 6-7 years, potentially disrupting TSMC’s manufacturing demand.
The implications are profound. If companies can achieve comparable AI performance with substantially lower computational resources, the entire semiconductor supply chain might experience a structural transformation. While TSMC remains a technological leader, it’s certainly worth keeping these emerging trends in mind.
Geopolitics Do Impact TSMC
No discussion on TSMC is complete without recognizing the impact of geopolitics. Two years ago, I was bullish, claiming the geopolitical risk was overdone. Back then, TSMC stock traded around $80. Now, with the stock at $220 and valuation multiples far higher, I’d suggest that geopolitical concerns are not being taken into account fully.
In addition to the ongoing concerns about a Chinese invasion of Taiwan, Donald Trump’s imminent return to the White House on January 20, 2025, presents another complexity. During his previous term, Trump’s administration imposed export restrictions that limited China’s access to advanced semiconductors, compelling TSMC to halt business with major Chinese firms like Huawei.
In his upcoming term, Trump is expected to intensify efforts to repatriate advanced semiconductor manufacturing. His “America First” policy may pressure TSMC to relocate its cutting-edge production to the U.S., potentially affecting its operations in Taiwan and maybe negatively impacting company-wide margins.
Furthermore, Trump’s appointment of Elbridge Colby as Undersecretary of Defense for Policy signals a more assertive stance. Colby has previously suggested that TSMC’s facilities should be disabled if China attempts to seize Taiwan. Needless to say, none of this sounds positive for shareholders. I say this despite TSMC’s valuation being relatively attractive.
TSMC’s price-to-earnings-to-growth (PEG) ratio sits at one, representing a 48% discount to the information technology sector as a whole. However, at 31x forward earnings, the valuation is still very growth-dependent, and this growth could be disrupted by geopolitics.
Is TSM Stock a Buy, According to Analysts?
On TipRanks, TSM 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 $232.50, implying about 12.3% upside potential.
The Bottom Line on TSMC Stock
I’m bearish on TSMC as its strong fundamentals are overshadowed by mounting risks. The return of Donald Trump to the White House could reignite geopolitical tensions, with policies likely to disrupt TSMC’s supply chains and operational efficiency. Additionally, emerging AI trends that reduce hardware demands may erode future growth in chip production. Combined with the possibility of cyclical headwinds in the semiconductor market, these factors could challenge TSMC’s ability to sustain its valuation, even as it remains a dominant player in advanced manufacturing.
