Taiwan Semiconductor Stock Up 26% in 6 Months: Hold or Book Profits?

Taiwan Semiconductor (TSM) shares have surged 25.6% over the past six months, outperforming peers and the broader sector, largely driven by a tripling of AI-related chip sales in 2024 and robust Q2 2025 results, which saw revenues jump 44% and EPS 61%. The company raised its 2025 revenue growth outlook to 30% and plans aggressive capital expenditure to solidify its leadership in advanced manufacturing for AI. Despite a reasonable forward P/E of 21.83, the outlook faces near-term challenges from softness in PC/smartphone markets, margin pressure from global fab expansion, and geopolitical risks, leading to a 'Hold' recommendation.

Analysis

Taiwan Semiconductor Manufacturing Company (TSM) has demonstrated significant market outperformance, with its stock rising 25.6% over the last six months, surpassing the 16.7% gain of the broader Zacks Computer and Technology sector and key peers. This momentum is fundamentally driven by the company's pivotal role in the artificial intelligence supply chain, evidenced by a tripling of AI-related revenues in 2024. Management's outlook reinforces this trend, projecting AI revenues to double again in 2025 and grow 40% annually for the next five years. The firm's financial strength is underscored by stellar Q2 2025 results, where revenue surged 44% year-over-year to $30.07 billion and EPS jumped 61%, prompting an upward revision of its full-year 2025 revenue growth guidance to 30%. However, this robust growth profile is tempered by significant near-term headwinds. These include margin pressure from its costly global expansion into the U.S., Japan, and Germany, which is expected to reduce gross margins by 2-3 percentage points annually. Furthermore, persistent softness in the PC and smartphone end-markets, projected for only low single-digit growth, and escalating geopolitical risks present notable challenges. Despite the stock's rally, its forward P/E multiple of 21.83 remains below the sector average of 27.25, suggesting a valuation that balances its strong growth prospects against tangible risks.

Key Decisions for Investors

• Given the powerful, multi-year growth narrative in AI and a valuation that remains below the sector average, investors with existing positions may find it prudent to hold TSM to capitalize on its long-term potential rather than booking profits.
• Investors should closely monitor gross margin evolution, as the guided 2-3 percentage point compression from global expansion represents a key risk; any deviation could signal greater-than-expected cost pressures.
• Monitor geopolitical developments, particularly concerning U.S.-China relations, as any new trade restrictions or supply chain disruptions could materially impact TSM's operational stability and revenue streams.
• While the AI story is the primary driver, watch for inflection points in the PC and smartphone markets, as a recovery in these segments would provide an additional, material catalyst for growth not fully priced into the current cautious outlook.