With many shares coming off the boil in recent weeks, opportunities have started to appear. One I see is in Taiwan Semiconductor Manufacturing Company (NYSE: TSM), a growth company that is trading near value stock levels after falling 21% in two months.
Longer term though, shares of Taiwan Semiconductor, or TSMC, have done splendidly. They’ve soared more than 300% in six years, as the firm’s leading position manufacturing advanced microchips has made it integral to the digital revolution.
Recently, TSMC’s growth has been boosted by the artificial intelligence (AI) boom. It works closely with Advanced Micro Devices, Nvidia, Broadcom, OpenAI, and others, while also making the latest chips powering Apple’s iPhone 16 lineup.
Indeed, TSMC now commands roughly 67% of the global third-party foundry market — and more than 90% of advanced chips!
Surging AI demand
How is that translating into profits? Very nicely. Last year, revenue increased 30% year on year to $90.1bn, while earnings per share surged by almost 40%. The net profit margin reached an incredible 40.5%, up from 38.8% the year before.
However, it wasn’t all positive. Both its Internet of Things (IoT) and digital consumer electronics platform segments decreased 15% and 6%, respectively, in the fourth quarter. And the firm does still experience cyclical demand for auto, computer, and smartphone chip sales.
Yet any softness in parts of the business is easily being offset by surging demand for AI chips.
Chief executive CC Wei commented: “Even after more than tripling in 2024, we forecast our revenue from AI accelerators to double in 2025 as a strong surge in AI-related demand continues as a key enabler of AI applications.”
Weakening silicon shield
One unavoidable risk with TSMC is geopolitics. Its most advanced chip manufacturing — including its 3nm and upcoming 2nm nodes — still takes place in Taiwan, roughly 90 miles away from mainland China.
Historically, Taiwan’s dominance in chipmaking has arguably protected the island from a Chinese invasion (the so-called “silicon shield”). That’s because the result would be a chip shortage and chaos in global trade, thereby threatening China’s own prosperity.
To reduce dependence on Taiwan, President Trump has encouraged TSMC to set up advanced fabrication facilities in the US. While this improves supply chain resilience for US customers, it might also weaken the silicon shield.
In other words, if TSMC’s cutting-edge chipmaking moves abroad, Taiwan becomes less essential — and potentially less protected.
Meanwhile, the company’s colossal $165bn commitment (so far) to US manufacturing and research and development might lead to margin pressure down the road.
Bargain valuation
This dynamic might go some way to explaining the stock’s valuation. It’s currently trading at 16.5 times this year’s forecast earnings, falling to around 14 for 2026 and 11.5 by 2027.
Granted, there are geopolitical risks here, but this high-quality stock looks like it’s on sale to me. Especially as TSMC is set for further growth through its enabling of developing megatrends like AI, IoT, and robotics.
Also, electric and autonomous vehicles require many more semiconductors than petrol cars. Tesla collaborates with TSMC to produce chips for its Full Self-Driving system.
Unfortunately, TSMC shares aren’t eligible for a Stocks and Shares ISA. But I think they’re well worth considering for a self-invested personal pension (SIPP).
