TSMC Faces Challenges but Promises Long-Term Growth Opportunities

Taiwan Semiconductor Manufacturing Company Limited (TSM), commonly referred to as TSMC, has seen a significant downturn, with shares dropping 26% year-to-date. This decline notably trails the Zacks Computer and Technology sector, which has decreased by 20.8% in the same timeframe.

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The sharp drop raises an important question for investors: Should they liquidate their holdings, or is it prudent to hold on? Although there are immediate challenges, TSMC’s long-term growth potential remains compelling, suggesting that maintaining investment might be wise.

Analyzing TSMC’s Recent Struggles

TSMC’s recent challenges are rooted in broader market issues and specific company risks. A technology stock sell-off, driven by concerns over trade tensions and global economic slowdowns, has affected the entire tech sector. Companies previously boosted by the AI boom, including TSMC, are now seeing corrections in their valuations.

On the company side, escalating energy costs in Taiwan, following a major electricity rate increase of 25% in 2024, have created hurdles, especially since advanced semiconductor nodes require more energy. Additionally, sluggish performance in key markets such as PCs and smartphones could limit growth; these markets are expected to post only low single-digit growth in 2025, which could stifle TSMC’s expansion despite the rising demand for AI technology.

Operational expenses are also rising, particularly due to TSMC’s ongoing international expansions into Arizona, Japan, and Germany. While these facilities are vital for diversification, they could lead to a dilution of gross margins by 2-3% annually over the next three to five years. This is a consequence of higher labor and utility costs alongside initially lower utilization rates.

Geopolitical uncertainties, especially those involving the United States and China, further complicate TSMC’s operational landscape. With considerable revenue flow from China, restrictions on exports and disruptions in the supply chain could adversely affect the company’s performance.

Despite these challenges, TSMC’s strong market position, solid financial performance, and optimistic long-term outlook support the argument for retaining the stock.

AI-Driven Growth Ahead for TSMC

The current AI boom places TSMC in the heart of a transformative growth phase. The company is increasingly recognized as a key manufacturing partner for AI accelerators, supporting major players like NVIDIA Corporation (NVDA), Advanced Micro Devices, Inc. (AMD), and Broadcom Inc. (AVGO).

In 2024, revenues from AI initiatives tripled, constituting a mid-teen percentage of TSMC’s total revenues, with growth momentum continuing. The firm anticipates that AI-related sales could double again in 2025, projecting a robust 40% compound annual growth rate over the next five years. This solidifies TSMC as a linchpin in the advancement of AI technologies.

The advancement to 3nm and 2nm process nodes is critical for TSMC’s sustained leadership. These newer nodes promise improved efficiency and performance, which will further enhance TSMC’s reputation as an industry leader in semiconductor manufacturing.

Committed to scaling up to meet AI-driven demand, TSMC plans to invest between $38 billion and $42 billion on capital projects in 2025, significantly above the $29.8 billion invested in 2024. Approximately 70% of this investment will focus on advancing manufacturing processes to ensure leadership in the sector.

TSMC is also looking to strengthen partnerships with U.S. chip designers like NVIDIA, AMD, and Broadcom. According to Reuters, discussions have been initiated about potential collaborations, including a joint venture for Intel’s foundry division that could benefit from reduced investments while expanding manufacturing capacity.

Strong Financial Performance from TSMC

TSMC’s recent earnings report underscores the company’s continued dominance. For the fourth quarter of 2024, TSMC recorded a 37% year-over-year revenue increase, totaling $26.88 billion, surpassing estimates by $504 million. The company reported earnings per share (EPS) of $2.24, edging past expectations, with gross margins improving to 59% as a result of better cost management.

Taiwan Semiconductor Manufacturing Company Ltd. Price, Consensus and EPS Surprise

Taiwan Semiconductor Manufacturing Company Ltd. price-consensus-eps-surprise-chart | Taiwan Semiconductor Manufacturing Company Ltd. Quote

Notably, the company’s 3nm and 5nm process nodes accounted for 60% of total wafer revenues, reaffirming TSMC’s leadership in advanced semiconductor production. High-performance computing, primarily driven by AI adoption, contributed 53% to TSMC’s total revenues.

Looking forward, TSMC anticipates first-quarter 2025 revenues between $25 billion and $25.8 billion, indicating a significant growth rate of 34.7% at the midpoint. Additionally, TSMC’s guidance for robust margins, set between 57%-59%, illustrates financial resilience against industry-wide cost pressures.

Historically, TSMC has a strong record of exceeding expectations. In the past four quarters, the company has consistently outperformed the Zacks Consensus Estimate for earnings, with an average surprise of 7.6%. For 2025, EPS is projected to rise by 30% to $9.15, reflecting continued earnings momentum.

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Valuation of TSMC Stock Remains Attractive