Taiwan Semiconductor Manufacturing Company TSM, also known as TSMC, has had an exceptional year, with its stock surging 46.7% over the past 12 months. Despite this rally, the stock remains attractively valued, trading at a forward 12-month price-to-earnings (P/E) ratio of 20.22, slightly below the Zacks Semiconductor - Circuit Foundry industry’s average of 20.92.

Forward 12-Month P/E Ratio

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This raises an important question for investors: Does TSMC’s discounted valuation present a buying opportunity? Given the company’s dominant market position, robust financials and promising long-term outlook, the answer appears to be a resounding yes.

One-Year Price Return Performance

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Strong Q4 Performance Reinforces TSMC’s Market Leadership

Taiwan Semiconductor’s fourth-quarter 2024 results reaffirmed its position as the undisputed leader in the semiconductor foundry industry. The company reported revenues of $26.88 billion, up 37% year over year, beating estimates by nearly $504 million. Earnings per share (EPS) came in at $2.24, surpassing expectations by 8 cents. This performance was driven by continued demand for TSMC’s cutting-edge 3nm and 5nm process technologies, which accounted for 26% and 34% of wafer revenues, respectively.

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Advanced process technologies (7nm and below) contributed 74% of wafer revenues in the fourth quarter, highlighting Taiwan Semiconductor’s technological edge over competitors. High-performance computing (HPC), a key growth driver, accounted for 53% of total revenues, with strong momentum fueled by AI-related demand. The company’s gross margin expanded sequentially by 120 basis points to 59%, reflecting improved capacity utilization and operational efficiencies.

Taiwan Semiconductor expects first-quarter 2025 revenues between $25 billion and $25.8 billion, implying a 34.7% year-over-year increase at the midpoint. The gross margin is projected at 57% to 59%, demonstrating resilience despite industry-wide cost pressures.

The Zacks Consensus Estimate for Taiwan Semiconductor’s 2025 EPS is pegged at $9.20, indicating a 30.7% year-over-year increase. The stock has a strong history of beating consensus EPS estimates. It surpassed the Zacks Consensus Estimate for EPS in each of the trailing four quarters, the average surprise being 7.6%.

AI and HPC Demand to Drive Multi-Year Growth for TSM

The ongoing artificial intelligence (AI) boom has placed Taiwan Semiconductor at the center of a multi-year structural growth cycle. The company has established itself as the preferred manufacturing partner for AI accelerators, including graphics processing units (GPUs) and custom silicon developed by major players like NVIDIA Corporation NVDA, Advanced Micro Devices, Inc. AMD and Broadcom Inc. AVGO.

In 2024, AI-related revenues tripled, accounting for a mid-teen percentage of total revenues. TSMC expects this segment to double again in 2025, reflecting continued investment from hyperscalers and data center operators.

Over the next five years, Taiwan Semiconductor forecasts a compound annual growth rate (CAGR) of approximately 40% for AI-related revenues, with AI accelerators becoming the largest contributor to incremental revenue growth. This positions TSMC as the backbone of the AI revolution, ensuring strong demand for its advanced process nodes, particularly 2nm and 3nm technologies.

TSM’s Capacity Expansion Enhances Long-Term Prospects

Taiwan Semiconductor’s aggressive capital expenditure (CapEx) plans strengthen its competitive advantage. The company is set to invest between $38 billion and $42 billion in 2025, significantly higher than the $29.8 billion spent in 2024. Approximately 70% of this budget is allocated to advanced process technologies, ensuring TSMC remains ahead of its peers in cutting-edge semiconductor manufacturing.

Taiwan Semiconductor’s global expansion strategy also adds to its growth potential. TSMC has begun high-volume production at its Arizona facility, while additional fabs are under construction in Japan and Germany. While overseas fabs carry higher costs, management expects their impact on gross margins to be limited to 2-3 percentage points annually. These investments reflect TSMC’s long-term vision of securing global supply-chain resilience while meeting growing customer demand.

Conclusion: Buy TSM Stock Now

Taiwan Semiconductor’s dominant position in the semiconductor foundry market, leadership in AI and HPC chip manufacturing and strategic investments in cutting-edge process technologies make it a compelling buy at current levels. With a discounted valuation relative to its growth trajectory and a multi-year AI-driven demand cycle underway, TSMC presents an attractive entry point for long-term investors.

Given its strong financials and technological leadership, accumulating TSM stock now appears to be the right move. Currently, Taiwan Semiconductor carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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