When people talk about AI stocks, most of the attention goes to the companies designing the chips. Most chip design companies are what is called “fabless”, meaning they don’t have any factories that fabricate the computer chips they design. This is where Taiwan Semiconductor (TSMC) comes in.

TSMC is strictly a semiconductor manufacturing company. They don’t design chips. Instead, they manufactures chips for the major designers like Nvidia, Apple, AMD, Broadcom, and Qualcomm. Those companies understand that their expertise is design and TSMC knows their place as the premiere manufacturer that takes the designs of other companies, keeps the design secret, and develop the manufacturing process for the fabless chip companies.

One reason investors pay so much attention to TSMC is its dominance in the chip manufacturing industry. It currently manufactures 60%-70% of all chips produced around the globe and 90% of the world’s high performance chips. That position gives TSMC real pricing power and a competitive advantage that is hard to replicate.

Two quick points about this stock that you need to know:

Note: TSMCs financial statements are issued in their native currency, the Taiwan Dollar (TWD). All figures have been converted to $USD for analysis purposes.

TSMC’s growth is the kind don’t see from an established manufacturing company. This is why this stock is enticing. Established AND in the leading position of the fastest growing industry. In the last 10 years, TSMC has only one year where revenue and margins were down (2023).

Margins are just as important as revenue, especially in a capital-intensive business.

Gross profit margins - how much money is left after paying for the cost of delivering the product or service to the customer.
Net profit margin - how much money is left after paying for all expenses including selling and administrative expenses (salaries, tools, maintenance and repairs, rent, utilities, etc.)

For a manufacturer, these are standout margins. Typical manufacturing companies land between 15% and 30% gross margins. After delivering the product to the customer, they have $0.59 on every dollar they bring in. After all expenses are paid, they walk away with $0.45 on every dollar. OUTSTANDING!

One nuance worth noting: revenue has grown faster than margins. Like we’re seeing with many companies, costs of doing business have risen recently and they can push some of the costs to the customer, but not a the rate of the cost increase. Still, the direction over time remains positive: TSMC has improved profitability while scaling.

A simple way to sanity-check balance sheet risk is to compare debt to free cash flow (FCF).

Reminder:

We want businesses to have a debt to FCF ratio of less than 3-5 years, depending on the type of business model. TSMC has an average D/FCF ratio of 1.4 over the past five years! That implies that, on average, TSMC could pay off its debt in roughly a year and a half with the cash flows they’re generating. That is a strong position and suggests solid balance sheet flexibility. If this company were to run into trouble, they’ll be able to get out of debt quickly.

Looking at where management is deploying cash allows to see their strategy for sustaining their competitive advantage. Free cash flow can be used for five things:

TSMC reinvested $40.7B in their business. This represents 53% of their cash generated from operations. Much of this is due to the expansion of their chip facility in Phoenix, AZ, a $165B+ endeavor. The company averages $33B per year in reinvestment of over the past five years. Expect this to continue as they establish their US manufacturing operations.

A low yield does not automatically make a stock unattractive. What matters is whether the dividend is supported by cash flows and whether there is room to grow.

That is a healthy payout level. It typically suggests room for the dividend to rise over time if free cash flow continues to grow.

One important expectation-setting point: TSMC’s dividend payments appear consistent in frequency (each quarter), but not consistent in amount quarter-to-quarter. Some companies “lock in” a steady quarterly dividend and raise it once per year. Others allow the dividend to fluctuate more with results and board decisions.

NOTE: Also, because this is a foreign company/ADR, dividend taxes can be different than U.S. stocks. Withholding taxes may apply depending on account type and tax rules. typically 15%-30%. If dividends are a core part of your strategy, it is worth understanding how foreign withholding impacts your net yield.

When ROC is meaningfully higher than WACC, the company is creating value. This is the quality check most investors miss!

That is outstanding, especially for a manufacturer. It reinforces the idea that TSMC’s competitive position is strong and sustainable.

Valuation is not an exact science. The goal is to be directionally right and avoid paying a price that bakes in unrealistic expectations.

In the valuation framework discussed, the assumptions included:

Based on my assumptions

TSMC is not in value territory, but we shouldn’t be strict on value for quality stocks. Premium stocks can be purchased at premium prices. This stock is a premium stock currently trading what I would consider to be fair valued.

For investors who like the long-term semiconductor theme but do not want to invest directly in Taiwan Semiconductor Manufacturing Company, one alternative is the VanEck Semiconductor ETF ($SMH).

$SMH ( ▲ 0.91% ) is an exchange-traded fund designed to track the performance of major companies involved in semiconductor production and semiconductor equipment. Instead of betting only on TSMC, investors get exposure to a broader basket of chip companies, including designers, manufacturers, memory companies, and equipment suppliers. That makes SMH a more diversified way to invest in the semiconductor value chain, though it is still a highly concentrated, cyclical, and technology-heavy ETF.

As of April 30, 2026, TSMC was SMH’s second-largest holding, making up 10.50% of the ETF.

TSMC looks like a rare kind of company: a dominant, high-quality manufacturer with strong revenue growth, excellent margins for its industry, solid balance sheet flexibility, and clear evidence of value creation (ROC well above WACC).

The biggest “non-financial” risk to keep on your radar is geopolitical risk related to Taiwan and the threat of a Chinese takeover. That said, TSMC’s ongoing U.S. expansion is an important factor that could help diversify manufacturing footprint over time, mitigating that geopolitical risk.

Investor takeaway: If you want exposure to AI and advanced chip demand, TSMC is a “picks-and-shovels” way to do it. Designers may rotate in and out of favor, but the manufacturer’s ability to build chips to support AI expansion will remain essential.