TSMC (TSM) Stock Still Looks Undervalued Despite A Very Large Run

Taiwan Semiconductor Manufacturing stock has delivered a very large 3 year gain, while the latest valuation work, including a Discounted Cash Flow (DCF) intrinsic value estimate and market multiples, both point to the shares trading below those fundamental estimates.

• Over the past 3 years, Taiwan Semiconductor Manufacturing has returned about 316%, which puts extra focus on whether the current price still leaves room relative to fundamentals.
• Strong demand for advanced chips used in AI infrastructure and ongoing capacity expansion can support expectations for future cash flows. At the same time, heavy capital spending needs and geopolitical concentration around Taiwan may weigh on how much investors are willing to pay for that growth.
• The broader checks are mixed, with Taiwan Semiconductor Manufacturing screening as undervalued on 4 of 6 valuation tests. This gives it a 4 out of 6 value score rather than a clear bargain or clear premium.

The stock's next move may depend on whether the current discount to the intrinsic value estimates and earnings multiples still compensates you for the risks around Taiwan Semiconductor Manufacturing's future cash flows and concentration in the global chip supply chain.

Taiwan Semiconductor Manufacturing delivered 85.9% returns over the last year. See how this stacks up to the rest of the Semiconductor industry.

Is Taiwan Semiconductor Manufacturing Still Cheap on Cash Flow?

The Discounted Cash Flow (DCF) model here values Taiwan Semiconductor Manufacturing based on its projected free cash flows to equity. The latest twelve month free cash flow is about NT$942.3b, and the projections assume growing cash flows from this base, which reflects ongoing investment in advanced capacity rather than a shrinking business.

On these assumptions, the DCF model points to an estimated intrinsic value of about $484 per share, which sits roughly 12.8% above the current share price. On this cash flow view, Taiwan Semiconductor Manufacturing appears to trade below the model’s estimate of intrinsic value. The recent S&P Global upgrade to an AA rating, which highlights balance sheet strength and cash generation, helps explain why some investors are comfortable with a value that remains above the stock’s current trading level.

Overall, the DCF work suggests that, relative to the cash flows currently built into the model, Taiwan Semiconductor Manufacturing stock may be priced below the model’s estimate of intrinsic value.

Our Discounted Cash Flow (DCF) analysis suggests Taiwan Semiconductor Manufacturing is undervalued by 12.8%. Track this in your watchlist or portfolio, or discover 46 more high quality undervalued stocks.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Taiwan Semiconductor Manufacturing.

Is Taiwan Semiconductor Manufacturing a Bargain on Earnings?

The P/E ratio is a useful way to look at Taiwan Semiconductor Manufacturing because earnings quality matters a lot for a capital intensive chip foundry. Taiwan Semiconductor Manufacturing currently trades at about 33.2x earnings, which sits well below the wider semiconductor industry average of roughly 61.8x and the peer group average of about 72.7x.

An estimated fair P/E ratio that takes into account Taiwan Semiconductor Manufacturing’s size, margins and risk profile is about 58.4x, which is significantly higher than where the stock is trading today. That gap suggests the market is applying a sizeable discount relative to what this tailored benchmark implies, even after strong interest around AI chips and related demand.

On this earnings multiple yardstick, Taiwan Semiconductor Manufacturing stock appears undervalued compared with both the industry and a more tailored fair P/E level.

See what the numbers say about this price — find out in our valuation breakdown.

The Taiwan Semiconductor Manufacturing Narrative: What Would Justify Today's Price?

Simply Wall St Narratives for Taiwan Semiconductor Manufacturing pick up where the valuation gap leaves off by spelling out which growth, margin and earnings paths would need to hold for the stock to be worth materially more or less than today’s price. Each one links a fair value to a particular mix of potential catalysts and risks in Taiwan Semiconductor Manufacturing's story, so you can watch which version appears to be unfolding over time on the Community page.

Community views on Taiwan Semiconductor Manufacturing sit far apart, from a capacity-driven upside story to a margin of safety concern.

Bull case: 6% undervalued

"The meat moving the needle right now is CoWoS packaging, TSMC is ramping up capacity with this packing to hit 125k per month by 2026…"

Read the full Bull Case to see why Taiwan Semiconductor Manufacturing could be undervalued

Bear case: 11% overvalued

"That tension, between the most magnificent business economics I have ever studied and the most sobering geopolitical risk I have ever priced, is the entire intellectual challenge of owning TSMC…"

Read the full Bear Case to see why Taiwan Semiconductor Manufacturing could be overvalued

Do you think there's more to the story for Taiwan Semiconductor Manufacturing? Head over to our Community to see what others are saying!

The Bottom Line

Taiwan Semiconductor Manufacturing screens as undervalued on both the Discounted Cash Flow (DCF) intrinsic value estimate and on earnings multiples, which is a rare alignment after such a large move in the stock. The key question is whether that discount is compensation for the concentration and geopolitical risks tied to Taiwan or an opportunity if the company continues to convert advanced capacity into durable cash generation. For many investors, the crux from here is whether the current earnings and cash flow profile can remain resilient enough that the market eventually closes some of that valuation gap.

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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