TSMC (NYSE:TSM) Valuation: Does the Latest Share Move Signal Opportunity or Stretch Expectations?

If you have been watching Taiwan Semiconductor Manufacturing (NYSE:TSM), you might have noticed shares moving a bit higher lately, with the stock gaining around 2% after its latest trading session. This move hasn’t been tied to flashy AI headlines or massive corporate shakeups. Instead, it is the sort of jump that grabs investors’ attention and makes you wonder whether there is something bubbling under the surface or if this is just another moment in the stock’s ongoing volatility.

Looking at the bigger picture, Taiwan Semiconductor Manufacturing has seen its share price climb nearly 38% over the past year, outpacing many peers thanks to consistent annual revenue and profit growth. There have been some dips, such as a small pullback over the past month, but momentum remains in play, especially following strong recent quarterly numbers and solid demand signals from major customers in both consumer electronics and high-end computing segments.

The question for investors now is whether the current price represents a real opportunity or if the surge is simply the market factoring in all the expected future growth. Is there still value to be found in TSM, or is the stock already priced for perfection?

Most Popular Narrative: 96.8% Overvalued

According to the narrative by StjepanK, TSMC's current market price is significantly higher than its estimated fair value by almost 97% using a discount rate of 8.5%.

TSMC served 532 customers in 2022; however, its top 10 customers accounted for over two-thirds of its revenues. While this would have been a significant risk if these companies were startups, the list is actually the opposite. Industry leaders such as Apple, Qualcomm, and NVIDIA are all highly dependent on TSMC for providing their advanced hardware, and management can rely on this fact as long as TSMC remains a clear leader in this space.

Is this bold fair value too pessimistic or a red flag that cannot be ignored? There is a surprising mix of ambitious growth assumptions and a future P/E ratio that might be unexpected. Interested in the detailed numerical logic behind this valuation and what it indicates about TSMC’s future income potential? Take a closer look at the full narrative, where every key assumption is fully explained.

Result: Fair Value of $118.40 (OVERVALUED)

Have a read of the narrative in full and understand what's behind the forecasts. However, risks remain, including the potential for escalating China-Taiwan tensions or disruptions in the global supply chain. These factors could quickly derail expectations. Find out about the key risks to this Taiwan Semiconductor Manufacturing narrative.

Another View: Our DCF Model Suggests Undervaluation

While the narrative points to significant overvaluation, our DCF model tells a different story. Using a cash flow approach, it indicates that TSM shares actually trade below their estimated fair value. Which method paints the truer picture?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Taiwan Semiconductor Manufacturing for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Taiwan Semiconductor Manufacturing Narrative

If you want to dig deeper or have a different perspective, you can examine all the available data and build your own outlook in just a few minutes. So why not do it your way?

A great starting point for your Taiwan Semiconductor Manufacturing research is our analysis highlighting 4 key rewards and 1 important warning sign that could impact your investment decision.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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