TSMC Faces Political Challenges Amidst Strong Fundamentals

Investing.com — The Taiwan Semiconductor Manufacturing Company (TSMC) has become a crucial player in the semiconductor industry due to its technological innovation and significance in global supply chains. However, recent political statements in the United States, particularly from former President Donald Trump, have introduced potential risks for TSMC's stock.

Trump’s Stance on Semiconductor Manufacturing

Trump's re-election campaign focuses on decreasing dependence on foreign semiconductor manufacturers such as TSMC, presenting challenges for the company.

Tariff Threats and Stock Impact

TSMC stock faces vulnerability due to Trump’s recent proposals for increased tariffs on foreign semiconductor manufacturers. He emphasizes the necessity for the US to boost its semiconductor production to lessen reliance on overseas manufacturers like TSMC. This could lead to raised tariffs as part of a reassessment of the CHIPS Act, influencing the company's cost structure and supply chains.

Although TSMC derives over 60% of its revenue from US clients, much of its chip production goes into products assembled outside the US, like the iPhone and AI data centers.

Citi analysts led by Laura Chen note, "For most cases, TSMC does not ship chips directly into the US market."

They add, "Applying tariffs based solely on the semiconductor content of imported finished products could result in complex audits across thousands of devices, driving up costs throughout the technology supply chain."

Strong Fundamentals Despite Risks

Despite these potential risks, Citi maintains that TSMC's fundamentals are sound. The company’s Arizona fab expansion, receiving a $6.6 billion subsidy from the CHIPS Act, is on schedule, with mass production set to begin in 2025.

Citi’s analysts state, "TSMC has announced that its N4 mass volume production would start from 2025 with a capacity of 20kwpm."

The second and third fabs are already in progress, and analysts believe that margin dilution is manageable, thanks to improved yield rates that are now comparable to its facilities in Taiwan despite rising overseas costs.

Furthermore, strong demand for AI data centers and edge AI devices promises earnings growth for TSMC into the following year, with the segment projected to grow by 30% year-on-year.

Analysts report, "Structural gross margin upward trends are supported by yield rate improvements and better utilization rates."

Even amid concerns regarding geopolitical tensions and further US restrictions on China post-election, the analysts believe TSMC’s effective execution and robust KYC systems with the US Department of Commerce can handle uncertainties.

Citi has maintained a Buy rating on TSMC stock, with a price target of NT$1,540, suggesting a potential return of nearly 47%.

Recently, TSMC's shares have surged to an all-time high, driven by unexpected strong third-quarter earnings and optimistic forecasts linked to rising AI technology demand.