Digital Transformation And AI Trends Will Expand Semiconductor Markets

Key Takeaways

• Sustained AI and digital transformation demand, along with advanced packaging leadership, positions TSMC for higher margins and long-term revenue growth.
  
• Rapid U.S. capacity expansion and strategic customer relationships enhance TSMC's geopolitical resilience and earnings visibility.
  
• Overseas expansion, global competition, geopolitical risks, soaring investment costs, and customer concentration all threaten to erode TSMC's profitability and revenue stability.

Catalysts

Manufactures, packages, tests, and sells integrated circuits and other semiconductor devices in Taiwan, China, Europe, the Middle East, Africa, Japan, the United States, and internationally.

• Analyst consensus expects robust AI demand and a doubling of CoWoS capacity, but this may underestimate the longevity and intensity of demand: management continues to see supply-demand imbalance for advanced packaging well into 2026, suggesting higher sustained pricing and utilization rates that could drive revenue and margin above current forecasts.
  
• While analysts broadly agree that advanced U.S. fab expansion positions TSMC to capture AI demand, they underappreciate the speed and scale at which TSMC is accelerating Arizona ramp-up, with multiple phases pulled forward and 30% of 2-nanometer capacity set to be U.S.-based-this could lead to outsized revenue growth from strategic U.S. customers and improve TSMC's long-term earnings power and geopolitical resilience.
  
• Proliferation of AI-powered devices and continued cloud, 5G/6G, and IoT digital transformation are driving exponential increases in silicon content per device, ensuring high utilization across leading-edge nodes and supporting upward pressure on average selling prices and revenue per wafer.
  
• Intensification of chiplet-based, custom silicon, and multi-die integration strategies by customers like Apple, Nvidia, and AMD is making TSMC indispensable as the only foundry able to deliver advanced process and packaging at scale, locking in multi-year, high-value contracts and boosting earnings visibility.
  
• Accelerating industry consolidation, surging R&D costs, and the wide adoption of 3D chip stacking and advanced packaging technologies are cementing TSMC's technology and pricing leadership, opening additional high-margin service lines and supporting sustained growth in net margins.

Taiwan Semiconductor Manufacturing Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Taiwan Semiconductor Manufacturing compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Taiwan Semiconductor Manufacturing's revenue will grow by 23.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 41.7% today to 43.8% in 3 years time.
• The bullish analysts expect earnings to reach NT$2582.4 billion (and earnings per share of NT$99.65) by about July 2028, up from NT$1309.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 20.3x on those 2028 earnings, down from 21.8x today. This future PE is lower than the current PE for the US Semiconductor industry at 24.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.93%, as per the Simply Wall St company report.

Taiwan Semiconductor Manufacturing Future Earnings Per Share Growth

Risks

• The overseas expansion, particularly the new fabs in Arizona and Kumamoto, is causing sustained gross margin dilution estimated at 2 to 3 percentage points per year initially and widening to as much as 3 to 4 percentage points in later years, which could negatively affect long-term net margins and earnings.
  
• Intensifying global competition, including US and EU subsidies for domestic semiconductor manufacturing and heightened investments from Samsung, Intel, and SMIC, threatens to erode TSMC's dominant global market share and diminish its revenue growth trajectory over time.
  
• Geopolitical tensions and the risk of stricter trade barriers or semiconductor-specific tariffs, particularly between China, the US, and Taiwan, could undermine TSMC's cross-border supply chain, disrupt operations, and reduce both revenue and profitability if major customers are impacted.
  
• Rapidly rising capital expenditures (CapEx) driven by the need to keep pace at the leading-edge nodes (such as 2-nanometer and below), combined with elevated costs of global expansion, increases the risk of lower returns on investment and pressures free cash flow, potentially compressing net margins and future earnings.
  
• Consolidation of customer demand among a few mega-cap tech clients like Apple, NVIDIA, AMD, and Qualcomm heightens revenue vulnerability-if any of these strategic customers shift production in-house or to alternative suppliers, TSMC's revenues and earnings could face significant downside risk.

Valuation

• The assumed bullish price target for Taiwan Semiconductor Manufacturing is NT$1565.92, which represents two standard deviations above the consensus price target of NT$1245.57. This valuation is based on what can be assumed as the expectations of Taiwan Semiconductor Manufacturing's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$1700.0, and the most bearish reporting a price target of just NT$950.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be NT$5896.4 billion, earnings will come to NT$2582.4 billion, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 8.9%.
• Given the current share price of NT$1100.0, the bullish analyst price target of NT$1565.92 is 29.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.