TSMC (NYSE:TSM) – Is the AI Powerhouse Undervalued or About to Hit a Wall?
TSMC’s AI-Driven Growth is Unstoppable – But Is the Stock a Buy Now?
Taiwan Semiconductor Manufacturing Company (NYSE:TSM) remains the backbone of the AI revolution, producing chips for tech giants like Nvidia (NVDA), Apple (AAPL), and AMD (AMD). Despite delivering blowout Q4 earnings with revenue up 38.8% YoY and EPS surging 57%, the stock recently saw a 13% pullback due to fears surrounding DeepSeek's AI efficiency breakthrough. But with AI demand still booming and TSMC ramping up production in Arizona and Taiwan, the real question is: Is this the best buying opportunity in the AI chip sector, or is a deeper correction ahead?
TSMC’s AI Dominance – Record Revenue and Explosive Growth in 2024
TSMC just reported a massive $26.88 billion in Q4 revenue, a 38.8% YoY jump, proving that demand for AI chips is still red hot. Even more impressive, gross margins hit 59%, a sign of pricing power in an industry struggling with inflation and rising costs. The biggest driver? High-performance computing (HPC), which now makes up 53% of total revenue, fueled by AI chip production for Nvidia, AMD, and Broadcom (AVGO).
The company guided for Q1 2025 revenue of $25–$25.8 billion, slightly lower due to seasonal slowdowns but still representing a 25% YoY growth rate. Despite concerns over China’s AI advancements, TSMC remains the undisputed leader in cutting-edge semiconductor manufacturing, with 74% of its total wafer revenue coming from advanced nodes (7nm and below).
Arizona Fab 21 and the U.S. Expansion – TSMC’s Bold Move to Secure American Customers
TSMC’s $65 billion investment in Arizona is already paying off, with its Fab 21 plant entering full-scale production in Q4 2024. This move is critical for securing long-term U.S. government contracts, especially with increasing geopolitical risks between Taiwan and China. The Arizona facility is producing chips for Apple’s A16 Bionic, AMD’s Ryzen 9000 series, and soon Nvidia’s Blackwell AI chips in late 2025.
While Arizona production costs are significantly higher than those in Taiwan, U.S. chipmakers are willing to pay a premium for locally sourced semiconductors. This means TSMC can maintain strong pricing and avoid potential tariffs if former President Donald Trump enacts stricter import regulations on Taiwanese chips.
DeepSeek’s AI Breakthrough – Is It a Threat to TSMC?
China’s AI company DeepSeek shocked the market by claiming its AI model is twice as efficient as OpenAI’s GPT-4 at half the cost. This sparked fears that AI chip demand could slow down, leading to TSMC’s stock dropping 13% in a single trading session. However, the reality is very different from the market’s knee-jerk reaction.
DeepSeek still relies on Nvidia’s H100 GPUs, which are manufactured by TSMC. In fact, reports suggest over 50,000 H100 GPUs were illegally smuggled into China to support DeepSeek’s model training. Even if AI models become more efficient, it will not reduce demand for AI chips—it will accelerate adoption. Companies will scale AI deployment faster, requiring even more GPUs and ASIC chips, all of which TSMC dominates.
AI Demand is Still Outpacing Supply – CapEx and Production Expansion
Meta (META) just announced plans to spend $65 billion on AI infrastructure in 2025, while Microsoft (MSFT) is investing $80 billion in its AI push. The combined CapEx of the largest AI players surpasses $300 billion, proving that AI spending is still at an all-time high. Even OpenAI is looking to raise $40 billion at a $340 billion valuation, confirming that AI investment is nowhere near slowing down.
TSMC is matching this AI demand with a massive production ramp. The company is boosting CapEx to $38–$42 billion in 2025, up 35% YoY, with 70% allocated to advanced node production. This level of investment ensures that TSMC will continue dominating the AI semiconductor market for years to come.
TSMC’s N2 and CoWoS Packaging – The Next Big Growth Driver
TSMC’s 2nm (N2) process is ahead of schedule, with volume production starting in early 2025 instead of H2 2025. This is a major advantage, as Apple’s A20 chips, AMD’s MI400X AI accelerators, and Broadcom’s next-gen ASIC chips will all use this N2 process.
At the same time, TSMC’s CoWoS packaging technology is fully booked for 2025, as Nvidia’s Blackwell AI chips will require significant CoWoS capacity. This packaging bottleneck has already forced Nvidia to delay some AI chip shipments, meaning TSMC is in a position to raise prices and increase profit margins in this segment.
TSMC’s Valuation – Still Undervalued Compared to AI Peers
Despite its rapid growth, TSMC trades at just 19x forward earnings, a deep discount compared to Nvidia’s 45x forward P/E and AMD’s 40x multiple. Given its 20%+ revenue CAGR and dominant position in AI chip manufacturing, this valuation looks absurdly low.
With EPS expected to grow 30%+ in 2025, TSMC’s stock could easily hit $300+ by late 2025, representing a 40% upside from current levels.
Geopolitical Risks – How China and Tariffs Could Impact TSMC
The biggest long-term risk remains China’s potential invasion of Taiwan, which could disrupt global semiconductor production. However, given the reliance of U.S. tech giants on TSMC, it is in America’s best interest to protect Taiwan’s semiconductor industry.
Additionally, Trump’s proposed 100% tariff on Taiwanese chip imports could hurt U.S. tech companies more than TSMC itself, as Apple, AMD, and Nvidia rely entirely on TSMC’s foundries. The Arizona expansion is a direct hedge against this risk, ensuring TSMC remains a key supplier even under stricter U.S. trade policies.
Buy, Sell, or Hold – What’s the Verdict on TSMC?
TSMC remains one of the strongest AI semiconductor plays, with unstoppable demand, massive expansion, and a dominant position in high-performance computing.
- Bullish Case: If AI demand keeps surging and TSMC maintains pricing power, the stock could climb to $300+ by 2025, delivering 40%+ gains from current levels.
- Bearish Case: If AI CapEx slows down, DeepSeek gains traction, or geopolitical risks escalate, TSMC could drop back to $180–$190 in a market correction.
Right now, TSMC looks like an AI bargain, trading at just 19x earnings while growing revenue at 30-40% YoY. For long-term investors betting on AI’s continued expansion, this stock remains a strong buy on dips.
