TSMC has taken a hit over the past few weeks, falling about 10% YTD amid market turmoil driven by President Trump's tariff threats. I believe this drop is more about short-term fears than any long-term issues, and it actually creates a buying opportunity.
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As the backbone of the world's most advanced processors, TSMC is the go-to contract manufacturer for tech giants like Nvidia (NASDAQ:NVDA), Apple (NASDAQ:AAPL), Qualcomm (NASDAQ:QCOM), AMD (NASDAQ:AMD), and more. These companies depend on TSMC for their flagship products, so any concern over global trade hits close to home. With Intel (NASDAQ:INTC)'s foundry efforts likely cooling off after their former CEO's departure, TSMC's market moat is only getting stronger. Despite the recent pullback, I see TSMC as a quality stock with long-term potentialone of those "buy and hold forever" opportunities. Let me explain why in this article.
Revenue Expansion and N2 Node GrowthIn my view, TSMC's revenue is expanding rapidly thanks to the huge build-out of AI infrastructure, which requires the latest technology on its most advanced process node. The hyperscalers are still pumping tens of billions into CapEx, keeping margins higheven for a contract manufacturer like TSMC that normally runs on thinner margins. A 43% profit margin in this business is very impressive and shows TSMC's ability to scale its CapEx to meet demand. Looking ahead, I expect a strong revenue trajectory as TSMC's N2 (2-nanometer) technology moves forward as planned, with volume production expected in 2025. Based on projected wafer starts and pricing, I estimate that N2 revenue could hit around $30B in 2026, accounting for roughly 22.5% of total revenue, which is a bit of a higher ramp than what was seen with N3.
Operating Leverage and Market DominanceA key part of TSMC's recent success has been the struggles of its major competitors like Intel and Samsung (KS:005930). With Intel's foundry efforts taking a back seat and Samsung facing yield issues on its 3nm process, TSMC now holds over 64% of the market, while Samsung lags behind at around 10%. Even after last year's rally, I see tremendous upside potential for TSMC, given that there's very little competition at the leading edge of processor manufacturing. I expect that as the industry moves toward an AI-focused future, TSMC will be able to charge more for its products, further boosting its margins. Approximately 60% of TSMC's revenue now comes from its latest or second-latest generation of chipsthe high-margin products that keep the company ahead.
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Another crucial driver for TSMC is advanced packaging, which has shifted from being an afterthought to a key part of the chip design process. With its Foundry 2.0 vision launched in 2024, TSMC has made advanced packaging a core element of its strategy. For example, NVIDIA uses TSMC's CoWoS technology for its most advanced Blackwell chips. Currently, advanced packaging makes up about 8% of TSMC's revenue and is set to grow at a 60% CAGR through at least 2026much faster than the overall corporate growth rate of 20% CAGR from 2024 to 2028. This not only improves margins but also deepens TSMC's moat, ensuring the company maintains its pricing power and market leadership.
CapEx and Geopolitical MovesLooking forward, TSMC has another $38 to $42 billion in CapEx planned for 2025, with about 70% allocated to advanced process technologies, 10-20% to advanced packaging, and the remainder to specialty technologies. This massive investment will help TSMC extend its technology leadership and meet rising demand. On the geopolitical front, TSMC has navigated recent challenges well. When the Trump administration announced 25% tariffs on semiconductors, it put many companies at risk. However, since TSMC's most advanced nodes are produced in Taiwan, the company has responded by announcing a $100 billion investment in U.S. facilitiesadding to previous investments under the Biden administration. Although these new plants won't produce the latest chips immediately, I see them as a strategic move to secure tariff exemptions and build goodwill. In my opinion, these initiatives further strengthen TSMC's long-term outlook and competitive edge.
Peer Comparisons and Valuation MultiplesSince TSMC is the only pure-play foundry with top-notch manufacturing, it's tough to compare it directly with others. That's why I looked at companies with similar techlike Intel for production and NVIDIA or ASML (AS:ASML) for their strong moats. Intel trades at about the same forward P/E as TSMC, but TSMC beats Intel in market share, earnings, and overall performance. In my view, if you can buy TSMC at the same price as Intel, there's really no reason to pick Intel. TSMC also trades at a lower forward P/E than NVIDIA (20.1x) and ASML (22.7x), and even Global Foundries, a smaller foundry player, trades above TSMC at 12.6x. Given TSMC's global importance, I believe the stock is still undervalued and could eventually command a higher multiplelikely in the high teens. I expect TSMC's forward P/E to expand to around 17x over the next two years, pushing its stock price into the $260s, which means about a 48% upside from today's levels.
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DCF Analysis Confirms UndervaluationTo back up my thesis, I ran a DCF model using a conservative 10% discount rate and a 4% terminal growth rate, which fits TSMC's long-term scale over the next 15+ years. Even with these cautious assumptions, the model gives TSMC a fair value of about $200.61 per shareproviding almost a 12% margin of safety. While the market may discount the stock due to regulatory and political risks, I think TSMC remains a less risky play in the AI industry, available at a lower multiple. Even if there's a short-term drop in AI demand, it won't hurt TSMC's numbers much, as the company is in an excellent position to capture future demand.
Concluding ThoughtsWithout TSMC, giants like Nvidia, Apple, and Broadcom (NASDAQ:AVGO) wouldn't be able to deliver the same high-quality products. I believe that as chips become even more central to everyday products, many more companies will come to rely on TSMC. With fewer competitors willing to make the massive investments needed in new foundriesespecially after Intel's strugglesTSMC has built a very strong long-term moat. This lower competitive pressure should help TSMC boost its revenue and margins even further. In my view, TSMC remains a key player in the tech ecosystem and is well positioned for the future.
This content was originally published on Gurufocus.com
