Taiwan Semiconductor: Overvalued Amid AI Demand

Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) has been a dominant player in the global semiconductor industry, with a commanding 60% market share. Its advanced chip manufacturing capabilities have positioned it as a key enabler of the artificial intelligence (AI) revolution. However, the company's recent stock price surge, driven by market exuberance around AI and advanced technologies, has raised concerns about its valuation.

TSMC's AI-related revenue is expected to double in 2024, growing at a 50% compound annual rate over the next five years. This growth is driven by the increasing demand for energy-efficient computing power in AI applications. As CEO C.C. Wei stated, "Almost all the AI innovators are collaborating with TSMC to address the insatiable demand for energy-efficient computing power." This expansion fortifies TSMC's competitive moat in advanced chip manufacturing, as it solidifies its position as a key player in the AI revolution.

However, the company's current valuation appears overinflated. The GF Value chart, a proprietary tool from GuruFocus, indicates that TSMC's stock is significantly overvalued. While TSMC's global fab expansion strategy, including fabs in Arizona, Japan, and Europe, boosts operational security and mitigates geopolitical risks, it also increases costs. These higher expenses are reflected in planned price hikes for advanced process manufacturing, which have been accepted by major clients like Nvidia, Apple, and Qualcomm.

Despite geopolitical risks and mature core markets, TSMC's AI-related revenue is set to double in 2024, contributing significantly to its growth. However, investors should be cautious and consider waiting for a more reasonable price-sales ratio before investing in TSMC. The current valuation, driven by market exuberance around AI and advanced technologies, appears overinflated, cautioning against new investments until a more reasonable valuation is achieved.

In conclusion, while TSMC's AI-related revenue growth and global fab expansion strategy are positive developments, the company's current valuation raises concerns. Investors should exercise caution and monitor the market for signs of a more reasonable valuation before making new investments in TSMC. As always, a balanced and analytical approach to investing, considering multiple perspectives and factors, is essential in navigating the complexities of the semiconductor industry and the broader market.