TSMC has a high degree of advantage in advanced logic chip manufacturing. (Illustration, AFP)
[Financial Channel/Comprehensive Report] Is Taiwan Semiconductor Manufacturing Company (TSMC) an undervalued AI stock worth buying now? Parkev Tatevosian, an investment analyst at foreign media "The Motley Fool", pointed out that although TSMC's stock price has risen sharply this year, considering the company's future growth prospects and current valuation, he still believes that TSMC is attractive for investment, and has raised his original confidence level from "medium" to "high."
He pointed out that demand for AI continues to heat up, and TSMC has become the main beneficiary. With the rapid development of generative AI, "agent AI" has recently begun to drive a new wave of semiconductor demand. In addition to GPUs and AI accelerators, the demand for CPUs, memories and storage components has also increased simultaneously, putting TSMC's already tight production capacity under pressure again.
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TSMC’s revenue in the past year has reached approximately US$143 billion, and the demand for AI has significantly accelerated revenue growth after the advent of ChatGPT. With the rise of agent-based AI, the market is expected to further expand semiconductor demand, forcing TSMC to continue to expand production capacity.
At present, TSMC's capacity utilization rate remains high. Even if the company does not significantly increase prices, it can still make profits by pushing up its high capacity utilization rate. The latest operating profit rate in the past year reached 55.84%, setting a new high in at least 10 years.
However, TSMC is also facing cost pressures caused by overseas production expansion. In order to meet customers' requirements for geographically diversified supply chains, TSMC continues to expand investment in Arizona, USA, and has invested an additional US$100 billion.
Major customers such as NVIDIA, Apple and AMD hope to reduce the geopolitical risks caused by the over-concentration of manufacturing capacity in Taiwan. Coupled with the US government's subsidy and tariff policies, these have become the driving force for TSMC to expand production in the United States.
However, TSMC management has repeatedly reminded that production costs in the United States are significantly higher than in Taiwan, and the expansion of overseas production capacity may compress overall profit margins in the long term. The current strong AI demand and high capacity utilization have temporarily offset some cost pressures, but management has not changed its expectation that profit margins may decline.
On the other hand, TSMC's stock price has risen by more than 48% this year, and its current expected price-to-earnings ratio is close to the high end of recent years. However, in terms of absolute valuation, TSMC is still lower than the average level of the S&P 500 Index constituent stocks. One of the reasons is that the market still gives TSMC a geopolitical discount.
Some analysts estimate that the reasonable value of TSMC's ADR is about US$639. If calculated based on the current market price of about US$445, the model predicts that there is still about 43% potential upside in the next 12 to 18 months. However, the actual stock price will still be affected by factors such as AI demand, semiconductor boom, overseas expansion costs, and geopolitics.
Overall, AI demand and agent-based AI continue to bring growth momentum to TSMC, but overseas production expansion may also become an important factor in lowering profit margins. As the stock price has risen sharply this year, the market will not only pay attention to whether the demand for AI can continue, but also closely observe whether TSMC can maintain its current high profitability while expanding overseas production capacity.
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