After Earnings, Is Taiwan Semiconductor a Buy, a Sell, or Fairly Valued?

Taiwan Semiconductor Manufacturing TSM reported fourth-quarter 2024 earnings on Jan. 16. Here is Morningstar’s take on Taiwan Semiconductor’s results and the outlook for the stock.

Key Morningstar Metrics for Taiwan Semiconductor Manufacturing

• Fair Value Estimate: $273.00
• Morningstar Rating: ★★★★
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Taiwan Semiconductor Manufacturing’s Q4 Earnings

Taiwan Semiconductor’s fourth-quarter 2024 revenue was $26.9 billion, up 39% year on year. Gross margin increased 6 percentage points from the year-ago quarter to 59%. The numbers beat management guidance.

Why it matters: Management provided upbeat guidance for 2025 and beyond. TSMC expects revenue to grow in the mid-20s in 2025 and average 20% over the next few years. This is higher than the previous guidance of mid-teens multiyear average growth and ahead of our 15% sales CAGR forecast.

• AI chips made up 15% of TSMC’s revenue in 2024, and by management’s mid-40s growth expectations, it will balloon to 50% of our revenue forecast by 2029. The upbeat AI outlook led us to raise 2025-28 revenue estimates by up to 21%.
• TSMC budgets capital spending at $38 billion-$42 billion for 2025, or over 35% of revenue. This is a 28%-41% jump from 2024’s $29.8 billion, lending credence to the firm’s latest revenue outlook. The figure is slightly ahead of our $37.1 billion forecast in October.

The bottom line: We raised our fair value estimate for TSMC to $273 per ADR share from $215, owing to a rosier outlook in AI demand and stronger-than-expected 2025 revenue guidance. TSMC’s shares are attractive, and it is our top pick among semiconductor foundries.

Bears say: Both large and small AI businesses are adding computing power to their arsenals with little regard to returns. Once some companies go bust, it may prompt a steep cut in AI data center spending.

Fair Value Estimate for Taiwan Semiconductor Manufacturing

Our base-case fair value estimate is $273 per ADR share, at which TSMC would trade at a forward price/earnings ratio of 32 times, per 2025 estimates. We use a weighted average cost of capital of 8.2% to discount our forecast cash flow.

We project the company’s top-line CAGR at 15.5% over the next five years. Even with its dominant market share, we believe TSMC can deliver above-industry growth through a higher proportion of more valuable 10nm-1.6nm logic and 28nm-12nm specialty products, which only it and Samsung currently produce at scale. We expect the Internet of Things and automotive applications to be sources of incremental demand for newer specialty products. In terms of node advancement, mass production of 3nm began in December 2022, and 2nm manufacturing is expected to begin in 2025.

Read more about Taiwan Semiconductor Manufacturing’s fair value estimate.

Economic Moat Rating

We believe TSMC’s wide moat stems from its cost advantage and intangible assets, which are realized from its leading position in process technology, or nodes. TSMC’s long-standing leadership in node advancement comes from its ability to correctly and consistently prioritize the right areas in which to innovate for nodes while maintaining fiscal discipline.

TSMC’s leading position in advanced processes should contribute to attracting and retaining more customers, more stable utilization of ever-expanding production capacities, and lower production costs, generating a higher return than peers because of the cost advantage and ensuring sufficient profits to fund research and development and capital expenditures on subsequent nodes. This virtuous cycle of intangible assets brought by heavy R&D and cost advantages prevents smaller peers from catching up, in our view.

Read more about Taiwan Semiconductor Manufacturing’s economic moat.

Financial Strength

TSMC has maintained a net cash position for the last 10 years. This, together with its low cost of debt, demonstrates the success of its strategy to focus on premium products. The company issued about $3 billion in domestic debt at a less than 2% yield in 2023, which is small relative to its balance sheet. We estimate TSMC to maintain a net cash position for the next five years.

Read more about Taiwan Semiconductor Manufacturing’s financial strength.

Risk and Uncertainty

Semiconductors are one of the most cyclical industries. TSMC derives about a third of its revenue from the smartphone market. The industry alternates between shortages and oversupply. Foundries cannot always raise prices during shortages yet have to deal with high fixed costs in all downturns. Compared with its peers, TSMC’s earnings volatility has been lower, with no earnings per share decline larger than 20% in the past 10 years. We expect this to continue as a result of TSMC’s dominant share in high-end products and customers’ preference for the firm as their primary (sometimes sole) foundry.

Currency risk is limited as most transactions are made in USD. Intellectual property theft is a major risk. The most high-profile incident was TSMC’s settlement with SMIC, in which the firm received shares and cash from SMIC after a series of legal disputes from 2003-09.

Read more about Taiwan Semiconductor Manufacturing’s risk and uncertainty.

TSMC Bulls Say

• TSMC should consistently earn higher gross margins than competitors, thanks to its economies of scale and premium pricing, justified by its cutting-edge process technologies.
• TSMC wins when customers compete to offer the most advanced processing systems using the latest process technologies.
• TSMC will benefit from more semiconductor firms embracing the fabless business model and internet giants designing their own data center chips.

TSMC Bears Say

• Although TSMC is the foundry leader, each generation of process technology matures and commoditizes quickly, forcing the company to deal with pricing pressure.
• TSMC’s new approach to diversifying production geographically may add cost pressures with little added resilience to stability.
• Samsung and Intel INTC are committed to heavy capital spending under the support of the US government. SMIC and other state-supported Chinese foundries also lurk as potential threats.

This article was compiled by Aman Dagra.