Taiwan Semiconductor Manufacturing Co. (TSMC) has seen an extraordinary surge in its stock price, climbing over 110% since its October 2022 low. While this meteoric rise has drawn enthusiasm from investors, concerns are emerging, even among bullish analysts, regarding the sustainability of the rally and the accompanying risks.
TSMC’s rally has been largely fueled by the global fervor surrounding artificial intelligence (AI), particularly following the performance of key customer Nvidia Corp. However, with AI-related revenue accounting for only 6% of TSMC’s total revenue last year, there are doubts about whether the market’s expectations for exponential growth in this segment are justified.
The stock’s relative strength index (RSI) has consistently signaled overbought conditions, suggesting that the pace of the rally may have outpaced underlying fundamentals. Moreover, TSMC’s stock price has surged to a significant premium over analysts’ price targets, prompting caution among market observers.
While Morningstar Inc. analyst Phelix Lee maintains an optimistic outlook, he acknowledges concerns about the sustainability of AI demand over the next few years. Despite TSMC’s optimistic projections of AI revenue growth, questions linger about the longevity of this trend, especially amid geopolitical uncertainties and potential shifts in global trade dynamics.
Geopolitical tensions, particularly between the U.S. and China, add another layer of uncertainty to TSMC’s outlook. The company’s expansion plans in the U.S., Japan, and Germany are seen as strategic moves to diversify its manufacturing footprint and mitigate geopolitical risks. However, questions remain about the impact of trade tensions and policy uncertainties on TSMC’s order book.
Additionally, analysts are closely monitoring Apple Inc.’s performance, as the tech giant accounts for a significant portion of TSMC’s sales. Concerns about weakening demand for iPhones, particularly in China, raise questions about TSMC’s future revenue streams.
Despite these concerns, both Morningstar and Mizuho Securities Asia Ltd. maintain a positive outlook on TSMC’s stock, citing its strong fundamentals and relatively attractive valuation compared to peers. With 35 buy ratings and minimal sell recommendations, investor sentiment remains largely bullish on TSMC’s prospects.
While the debate about overheating in the AI sector persists, analysts agree that TSMC’s valuation remains reasonable, trading at around 16 times estimated earnings for next year. As TSMC continues to navigate challenges and capitalize on opportunities in the AI-driven semiconductor market, investors will closely monitor developments to assess the company’s long-term growth trajectory.
