When the World Fractures, TSMC Matters More

Recent geopolitical developments (most notably escalating tensions in the Middle East, including the US' "brilliant" strikes on Iran 2026 by its "dear leader", alongside rising energy prices) introduce a more complex macro backdrop for TSMC.

At first glance, higher oil prices and global uncertainty appear negative, implying demand risk and multiple compression. However, the second-order effects are more nuanced and, I assert, reinforce my original thesis...

Compute demand resilience: AI, cloud, and high-performance computing remain strategic priorities for both governments and hyperscalers, increasingly insulated from short-term economic cycles.
Supply chain prioritisation: Geopolitical fragmentation is accelerating semiconductor onshoring and redundancy efforts, but these initiatives depend on TSMC’s process leadership rather than displacing it.
Scarcity premium: In a more unstable world, irreplaceable infrastructure assets (particularly those central to blowing up people, apparently) arguably warrant higher, not lower, valuation multiples.

That said, two adjustments are warranted:

Slight moderation in growth expectations due to potential cyclical softness and energy-driven cost pressures.
Higher risk premium applied to geopolitical concentration, particularly regarding Taiwan.

Updated base-case assumptions:

Growth (PA): 10-11% (from 12%)
Profit margin: 36-38% (unchanged structurally, but with more volatility)
Future P/E: 30-33x (reflecting higher discount rates and geopolitical risk)

Net effect: While near-term valuation multiples may compress due to macro uncertainty, the strategic indispensability of TSMC is increasing. This creates a wider divergence between market pricing (which overreacts to uncertainty) and intrinsic value (which is reinforced by it).

MY UPDATED CONCLUSION: The recent geopolitical insanity introduces volatility, not thesis breakage. If anything, it strengthens the case for viewing TSMC as critical global infrastructure, though with a modestly higher required return to justify investment.

96 views

Main Assertion

TSMC is undervalued. That might be insane for the a top 10 largest company in world by market cap, but a basic considering of the facts and status within the broader economy makes this self-evident:

TSMC is NOT merely a cyclical semiconductor manufacturer; it is critical infrastructure for the global digital economy.
Its combination of scale, process leadership, capital discipline, and customer entrenchment supports sustainably high margins and above-GDP growth.

I therefore offer a valuation that considers it's very components and overall valuation holistically, not merely through abstraction. Notably:

The current valuation embeds mean-reversion assumptions that ignore the durability of advanced-node dominance and AI-driven demand.
On reasonable long-term assumptions, TSMC supports a meaningfully higher intrinsic value than implied by today’s market multiple.

Argument in Favour of a Stronger Valuation

Especially:

AI and HPC wafer intensity: Advanced logic demand scales super-linearly with compute complexity, not unit volumes. TSMC's world class R&D ensures success.
Process gap persistence: Leading-edge nodes (N3, N2 and beyond) reinforce a winner-takes-most cost curve. TSCM is basically the only company in the race.
Customer lock-in: Fabless leaders design around TSMC’s process roadmap, structurally reducing switching optionality. They're the only game in town!
Capital efficiency inflection: As node shrink slows, incremental capex increasingly converts into free cash flow rather than transient advantage.

Possible Mitigating Risks

There are a few issues, especially:

Geopolitical concentration: Self-explanatory. TSMC might not exist, at least in it's current form, if a certain regional bully gets its way.
Customer bargaining power optics: Large customers appear powerful, but in practice lack viable alternatives at scale.
Node transition execution: Yield slippage at leading edge would delay margin normalization.
Regulatory pressure: Export controls may shape mix, but do not negate global compute demand.

Assumptions (Explicit, Not Consensus)

Revenue growth normalizes below historical peaks but remains structurally elevated.
Net income margins compress modestly from recent highs but remain far above industry averages due to scale and technological moat.
Share count remains broadly stable.
No heroic terminal assumptions: valuation is driven by cash generation, not terminal multiple expansion.

Valuation Framework

Here's where we get to the heart of the matter. Consider the following...

TSMC’s reported trailing data shows:

Revenue (LTM): NT$3.81T
Net income margin (LTM): ~45%
Net income (LTM): NT$1.72T

Rather than applying a market-average semiconductor multiple, it's more sensible to treat TSMC as a platform monopoly with regulated-utility-like inevitability and software-like margins.

Base-case intrinsic framework:

Sustainable growth above global GDP
Margins structurally double the industry average
A terminal multiple reflecting durability, not cyclicality

This supports a future earnings multiple materially above today’s implied forward PE, even after margin normalization.

Conclusion

The market prices TSMC as a cyclical manufacturer with transient pricing power. The financial reality supports pricing it as irreplaceable infrastructure with compounding economics.

Therefore, I argue that it is undervalued relative to actual worth!

Have other thoughts on Taiwan Semiconductor Manufacturing?

Create your own narrative on this stock, and estimate its Fair Value using our Valuator tool.

Create Narrative

How well do narratives help inform your perspective?

Disclaimer

steingar is an employee of Simply Wall St, but has written this narrative in their capacity as an individual investor. steingar holds no position in TWSE:2330. Simply Wall St has no position in any companies mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. This narrative is general in nature and explores scenarios and estimates created by the author. The narrative does not reflect the opinions of Simply Wall St, and the views expressed are the opinion of the author alone, acting on their own behalf. These scenarios are not indicative of the company's future performance and are exploratory in the ideas they cover. The fair value estimate's are estimations only, and does not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that the author's analysis may not factor in the latest price-sensitive company announcements or qualitative material.