Following the election of William Lai Ching-te as Taiwan’s President, representing the Democratic Progressive Party (DPP) and winning 40.2% of the votes in a three-way race, concerns have emerged regarding the potential impact on Taiwan Semiconductor Manufacturing Company (TSMC) stock. The election of a DPP leader signifies a more distinct Taiwanese identity apart from China, potentially heightening risks of escalation with Beijing.

While the heightened geopolitical tensions present risks for TSMC, a deeper analysis suggests that concerns may be overblown. Diversifying portfolios away from companies directly dependent on TSMC for growth and exploring uncorrelated industries, asset classes, and diverse country exposure may offer a prudent approach amid potential escalation in global geopolitics, hinged on US-China relations.

2024 Election Update

The vice president-elect of Taiwan, Hsiao Bi-khim, emphasized TSMC’s significance to the country during the election, describing it as “the pride of Taiwan” and “a sacred mountain protecting the country.” Additionally, Taiwan has been diversifying its external economic activities away from China, including investments and exports to the US and ASEAN. Controversies over TSMC’s US investments, such as the Arizona plant, could indicate growing anxieties surrounding Taiwan-US and US-China relations.

If heightened geopolitical tensions result from a stronger independence stance in Taiwan, trade relations may be affected, potentially impacting TSMC’s operations, especially as China is a large market for semiconductors. Changes in policy that affect the company’s operational freedoms may also influence investor sentiment. On the other hand, bolstered ties with the US in technology and trade could potentially drive an increase in TSMC stock price.

Current Financials

Despite strong profitability, with a Quant Factor Grade A+, TSMC’s growth is graded at a lower D+, with valuation rated a C. Charting TSMC’s net income margin over the long term reveals a moderate growth trajectory, approaching an already high figure of about 40%. The firm’s revenues have shown significant growth but experienced a moderate decline over the past year.

These financial shifts have been influenced by the global macroeconomic environment, featuring higher interest rates and inflation post-pandemic. The increased costs of borrowing and prices have impacted consumption habits, particularly in the technology sector dependent on advanced semiconductor chips.

Comparative Analysis

Comparing TSMC’s net margins to peers shows its dominant position in the industry, despite a stark rise in total liabilities in recent years in comparison to total equity. This surge is driven by the firm’s strategic expansion and technological advancements, often funded by debt, including the investment of $43.5 billion in the US with the Arizona plant.

Valuation Update

TSMC’s forward P/E ratio of around 20, combined with a Quant Factor Grade B+ and a forward PEG non-GAAP ratio of 2.75 (Quant Factor Grade C-), positions it favorably relative to its peers, indicating a relatively strong performance compared to rivals such as Intel (INTC) and Advanced Micro Devices (AMD).