TSM Stock Analysis: Why You Should Wait for Taiwan Semiconductor to Drop to $150

Leading contract chip manufacturer Taiwan Semiconductor Manufacturing (NYSE:TSM) has undeniably been a market darling so far in 2024. The stock’s ascent to an all-time high of $193.47 on July 11 shows its dominant position in the global chipmaking landscape.

TSM stock has surged over 50% year-to-date (YTD). It has significantly outperformed the Philadelphia Stock Exchange Semiconductor Index (NASDAQ:SOX), which has managed a respectable 25% YTD gain. However, this impressive advance has propelled TSM’s valuation metrics to elevated levels, raising concerns about the sustainability of the price rally. In fact, TSM shares, which have come under presure in the second half of July, are now trading 17% below its all-time highs.

Make no mistake, the long-term outlook for TSM remains robust due to its dominance in the chipmaking industry. Yet, a near-term price decline could present a more attractive entry point for investors seeking to capitalize on TSM’s growth trajectory. We suggest a cautious approach: it may be wise to hold off on buying TSMC stock in the immediate term. However, looking beyond the present frothiness and volatility, Taiwan Semiconductor’s robust fundamentals and strategic industry position indicate solid long-term prospects.

Geopolitical and Valuation Concerns For TSMC Stock

Let’s start our discussion with geopolitical tensions between China and Taiwan, which potentially pose a significant risk to TSM stock. The threat of political instability could lead to disruptions in Taiwan Semiconductor’s operations. In fact, a potential invasion of Taiwan by China could be catastrophic for TSM. Such a scenario could disrupt the global chip supply chain, causing significant economic damage worldwide.

Adding to geopolitical concerns is the U.S. presidential elections in November. The potential effects of a second Trump presidency on Taiwan and TSM stock could be significant and multifaceted. The Republican presidential nominee has recently suggested that Taiwan should pay the U.S. for its defense. As a result, TSM stock dropped significantly, as investors weighed the implications of the remark.

In addition to geopolitical concerns, Wall Street is looking at TSM’s high valuation metrics. At present, Taiwan Semiconductor stock’s price-to-earnings (P/E), price-to-book (P/B) and price-to-sales (P/S) ratios are 27.5x, 6.7x, and 10.4x, respectively. These figures are notably higher compared to industry peers, which average 18.4x, 4.3x, and 5.1x. This premium valuation suggests that some of the future growth potential for Taiwan Semiconductor may already be priced into the stock.

Long-Term Potential of TSM Stock

Taiwan Semiconductor’s long-term growth prospects are particularly promising given the accelerating adoption of artificial intelligence (AI). As AI applications increase worldwide, the demand for high-performance computing power as well as semiconductor chips have been surging.

The future looks bright for the technology sector, particularly for semiconductors and AI. Both industries are projected to enjoy a significant compound annual growth rate (CAGR) in the coming years. According to recent research, the global semiconductor market size is expected to reach around $1.1 billion by 2033, a CAGR of more than 7.5%. Similarly, the global AI market is expected to grow at a CAGR of over 28.0%, exceeding $825 billion by 2030.

On July 18, Taiwan Semiconductor reported consolidated revenue of 673.51 billion New Taiwan dollars, a 40.1% year-over-year (YOY) increase. Net income also soared 36.3%. TSM’s business was boosted by strong demand for its industry-leading 3 nanometer (nm) and 5nm technologies. Looking ahead to the third quarter of 2024, management expects over a 30% YOY revenue increase.

For long-term investors, TSM looks like an excellent investment. Yet, at this point, they should be ready to weather short-term volatility.

The Bottom Line: Wait to Buy into TSMC stock

In conclusion, investors need a measured approach to committing new capital to TSM stock. The confluence of geopolitical headwinds and currently elevated valuations necessitate a “hold” recommendation for the immediate future. Investors interested in adding TSM to their portfolios may find a more attractive entry point following a potential price correction.

Looking at a longer-term technical chart, we expect an initial decline toward the $150 level. This could be followed by a period of consolidation within a $135-$165 trading range, after which a new leg in TSM stock up can potentially begin.

Despite the near-term considerations, TSM’s long-term prospects remain robust. Taiwan Semiconductor’s leadership in the chipmaking industry positions it to benefit from the secular growth trends in semiconductors and AI. Finally, analysts’ long-term sentiment on TSM remains positive. Wall Street’s 12-month median price forecast of $210.27 for TSM stock suggests over a 30% upside potential.

On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.