Taiwan Semiconductor Manufacturing Company, or TSMC (NYSE:TSM), is the global behemoth of chip manufacturing. It’s also one of the few companies in the sector that is clearly trading at a discount to its intrinsic value — at least its quantitative intrinsic value. Of course, the issue is that TSM stock is devalued due to concerns about the location of the majority of its fabs — on the island of Taiwan — and the perennial threat of Chinese invasion.
Like many investors, I’ve misinterpreted geopolitical events before. As such, I’m cautious about investing in a stock with geopolitical baggage. However, I am still bullish on TSMC. The company’s metrics are strong, it remains central to the revolution in artificial intelligence (AI), and geopolitical concerns are perhaps less pressing than they were a few years ago due to diversification efforts.
TSMC’s Concentration Risk
TSMC’s geographical concentration is in Taiwan. The company has four 12-inch wafer fabs, four eight-inch wafer fabs, and one six-inch wafer fab on the island. While the chip giant has expanded out from Taiwan with operations in China, Japan, the U.S., and now Germany, its operations remain geographically concentrated.
Some investors are concerned that Chinese rhetoric and aggression may one day morph into an outright invasion of the island. Personally, I’m not convinced that the Chinese Communist Party’s (CCP) aim to reunify with Taiwan will continue after the party is no longer in power. I know that’s a bold statement, but I accept that Chinese aggression remains a threat.
Another threat, perhaps less talked about, is that Taiwan experiences a lot of seismic activity, and a “single vibration can destroy entire batches of the precision-made semiconductors,” according to Bloomberg. TSMC estimated that the earthquake that hit on April 3 caused $92.44 million in losses.
This was the biggest earthquake to hit the island in two decades, so something on this scale is uncommon. However, the impact is considerable and is expected to result in a 50-basis point drop in TSMC’s second-quarter gross margin.
TSMC also suffers, to a lesser degree, from revenue concentration risk. Media reports suggest that Apple (NASDAQ:AAPL) represents 25% of company revenues. This could make TSMC vulnerable to a downturn at Apple — the tech giant saw iPhone sales fall by 19% in the first three months of the year in China, according to Counterpoint Research.
TSM Stock Is Still Cheap
TSM stock has performed well in recent months. The stock is up 28.3% since the start of the year and 53.3% over the past 12 months. It’s clear that TSMC is benefiting from positive trends in AI. In fact, demand generated from the AI segment is making up for slowing growth in mature markets like smartphones.
TSMC is the global leader in manufacturing the most advanced AI processors and their components despite the acclaim presented to its peers and clients. This leadership has been advanced by developments in 3nm process technology, and its dominance is likely to continue with the upcoming 2nm nodes expected in 2025.
Collectively, this has led analysts to suggest that revenue and earnings growth will surge over the coming years. In fact, earnings per share are expected to grow by 22.72% annually over the medium term — the next three to five years.
And that’s important because TSMC is currently trading at 22x forward earnings. As such, the all-important — in my opinion — price-to-earnings-to-growth (PEG) ratio is below one. As you may know, a PEG ratio under one suggests that a stock is undervalued. TSMC’s PEG ratio is 0.97.
Looking forward, and based on earnings forecasts, TSMC trades at 17.7x earnings for 2025 and 15.3x earnings for 2026. These figures represent significant discounts versus the tech sector as a whole, but there’s an interesting comparison with its peer, Intel (NASDAQ:INTC). Intel trades at 25.6x forward earnings, but earnings growth is expected to be marginally stronger, leading to a forward price-to-earnings of 11.85x for 2026.
However, it’s worth noting that TSMC’s net cash position is considerably stronger than Intel — the former has a net cash position of $25.9 billion, while the latter’s net debt position has reached $24.3 billion.
Is TSM Stock a Buy, According to Analysts?
On TipRanks, TSM stock comes in as a Strong Buy based on 10 unanimous Buy ratings assigned in the past three months. The average TSM stock price target is $164.13, implying 18.5% upside potential.
The Bottom Line on TSM Stock
No investment is risk-free, and that’s certainly the case with TSMC. Russia’s invasion of Ukraine taught many of us that we must be aware of geopolitical tensions and events when investing, and it’s no different here. However, I’d suggest that concentration risk is also a seismic issue, not just a geopolitical one.
Nonetheless, TSM stock is attractive, given its 0.97 PEG ratio and strong growth expectations. This discount naturally reflects concerns about concentration risk, but it’s also worth recognizing that TSMC’s sector dominance is deserving of a premium. So, while I’m wary of the risks, I’d expect TSMC to push higher. It’s undervalued, just maybe not vastly undervalued.
