3 Reasons to Buy Taiwan Semiconductor Manufacturing Stock Like There's No Tomorrow

Taiwan Semiconductor reported robust Q4 results with revenue up 26% year-over-year and EPS up 35%, while high-performance computing (including AI) now represents 58% of revenue and smartphones 29% (2025). Margins expanded—gross margin 62.3% (from 59%) and operating margin 54% (from 49%)—management signaled increased capital expenditures to meet rising demand, and the shares trade at an attractive forward multiple (~18x), implying continued upside if AI-driven capacity growth materializes.

Analysis

Market structure: TSMC (TSM) is the primary beneficiary—high-performance computing (58% of revenue) plus smartphone resilience (29%) give it pricing power as hyperscalers scale AI. Rising gross (62.3%) and operating (54%) margins signal scarce advanced-node capacity; management-guided capex increases are consistent with demand outpacing supply, supporting ASPs and semicap-equipment makers (ASML/LRCX). Cross-asset: stronger capex and rate-sensitive tech cashflows favor credit spreads tightening for quality chipmakers, push semicap equities higher, lift demand for noble gases/metals, and increase FX sensitivity to TWD and USD movements.

Risk assessment: Key tail risks are geopolitical (China-Taiwan escalation or tighter export controls) and operational (EUV tool bottlenecks, major fab accident) that could erase quarters of revenue—probability low but impact >30% EBITDA loss scenario. Timeframes: expect headline-driven share moves in days, capex and tool deliveries to drive quarters (3–12 months), and structural share/gross-margin shifts over years as fabs come online. Hidden dependencies include customer concentration (NVIDIA/AAPL) — a single large design win/loss can swing 5–10% of revenue — and deferred supply lead times (18–36 months for new capacity).

Trade implications: Tactical: overweight high-performance foundry exposure (TSM) and semicap equipment (ASML, LRCX) while underweight legacy IDM/PC-exposed names (INTC). Pair: long TSM vs short INTC captures foundry/share shift; size relative positions 2:1 risk notional. Use options to express asymmetric risk: buy 9–15 month call spreads on TSM (delta ~0.3–0.5) and fund with 3–6 month OTM put spreads (10–20% OTM) as geo tail hedges.

Contrarian angles: Consensus underestimates the risk that aggressive capex turns into oversupply 12–24 months after tool delivery, pressuring ASPs and ROIC; history (past TSMC cycles) shows 12–18 month lag to margin compression. Also underpriced is subsidy-driven onshoring (US/EU) that could partially reroute future high-margin work and compress long-term foundry pricing. Hedge sizes modestly (0.5–1% portfolio) and prefer staged entry to avoid late-cycle complacency.

Key Decisions for Investors

• Establish a 2–3% portfolio long position in TSM (buy on weakness; average-in over 6–12 weeks). Add more if forward P/E stays ≤15x or shares drop ≥15% from today, target 12–18 month hold to capture AI cycle and new capacity benefit.
• Implement a pair trade: go long TSM (notional 2%) and short INTC (notional 1%) to express foundry premium vs legacy IDM weakness; rebalance monthly and trim if TSM/INTC spread narrows below historical mean by >25% within 3 months.
• Buy a 9–15 month TSM call spread (delta ~0.3–0.5) sized ~1% portfolio for upside exposure, funded by selling 3–6 month near-ATM covered calls or using a small short INTC position; simultaneously buy a 6–9 month 10–20% OTM TSM put spread (~0.5% portfolio) as geopolitical tail insurance.
• Increase exposure by 1–2% to semicap/equipment leaders (ASML, LRCX) on any TSM-driven strength; reduce direct exposure to PC-centric/IDM names (cut INTC position by 50% within 30 days) as relative demand shifts to advanced-node foundries.