Before Taiwan Semiconductor Manufacturing Co. TSM reported earnings this month, Morningstar Chief US Market Strategist Dave Sekera said on The Morning Filter podcast, “With as hot as the AI buildout boom is running, in my opinion, I’d say there’s a much higher probability of upside to our revenue forecasts and our operating margins than there is downside.” He was right: After TSMC posted impressive results and issued buoyant guidance, Morningstar raised its fair value estimate on the stock to $428 per ADR—a 38% increase—to reflect higher expectations for durable artificial intelligence spending. After the boost, the wide-moat chipmaker’s stock looks like a buy, trading 24% below fair value.

TSMC is the world’s largest dedicated contract chip manufacturer, or foundry, with about 70% market share in 2025. It makes integrated circuits for customers based on their proprietary designs. TSMC has long benefited from semiconductor companies around the globe transitioning from integrated device manufacturers to designers without their own foundries. We see two long-term growth factors for TSMC. First, the consolidation of semiconductor companies is expected to create demand for integrated systems made with the most advanced nodes. Second, the organic growth of artificial intelligence, Internet of Things, and high-performance computing applications may last for decades.

Key Morningstar metrics for TSMC

  • Fair Value Estimate: $428
  • Star Rating: 4 Stars
  • Economic Moat Rating: Wide
  • Uncertainty Rating: Medium

Economic Moat Rating

We believe TSMC’s wide moat stems from intangible assets that are realized from its leading position in advanced process technologies in semiconductor manufacturing. It enjoys a cost advantage stemming from its ability to spread unit research and development costs, given its dominating scale. TSMC’s long-standing leadership in node advancement comes from its ability to work with customers years in advance to identify the optimal improvements in power, performance, area, cost, and time to market for each chip while maintaining fiscal discipline. This has justified higher prices than peers. TSMC’s leadership creates a virtuous cycle of premium products, premium pricing, and profits for next-generation R&D. We project TSMC to achieve low-20s returns on invested capital in the next five years, above its weighted average cost of capital of 8.2%.

Fair Value Estimate for TSMC stock

Our fair value estimate is $428 per ADR, at which TSMC would trade at 26 times estimated 2026 earnings. We use a weighted average cost of capital of 8.2% to discount our forecast cash flows. We project a 20.9% top-line compound annual growth rate over the next five years. We project 2026 gross and operating margins to be higher year on year at 61% and 50%, respectively, as profitability of 3-nanometer production improves and revenue of high-gross-margin AI products grows faster than expected. While quarterly margins may fluctuate while the company ramps up production of a new node, long-run margins should be stable, as we expect TSMC’s moat to support its pricing power for years to come. Management aligns its interests with the 56% gross margin target by listing it as one of the criteria for performance-linked bonuses.

Risk and Uncertainty

TSMC operates in the semiconductor industry, which is one of the most cyclical. Foundries cannot always raise prices during shortages but have to deal with high fixed costs in all downturns. The company has client concentration risk, with the largest customer contributing 22% of revenue in 2024 and the top four clients about 50%. Intellectual property theft is a major risk. The most high-profile incident was the settlement with SMIC, in which TSMC received shares and cash from SMIC after a series of legal disputes from 2003 to 2009. TSMC’s expansion requires a lot of land, electricity, and water. Land acquisition may be slowed by objections from locals. Currency risk is limited, as most transactions are made in US dollars.

TSMC bulls say

  • TSMC should consistently earn higher gross margins than competitors, thanks to its economies of scale and premium pricing that is justified by cutting-edge process technologies.
  • The company wins when its customers compete to offer the most advanced processing systems using the latest process technologies.
  • TSMC will benefit from more semiconductor companies embracing the fabless business model and internet giants designing their own data center chips.

TSMC Bears Say

  • Although TSMC is the foundry leader, each generation of process technology matures and commoditizes quickly, forcing the company to deal with pricing pressure.
  • TSMC’s new approach of diversifying production geographically may add cost pressures with little added stability.
  • Samsung and Intel are committed to heavy capital spending supported by the US government. SMIC and other state-supported Chinese foundries also lurk as potential threats.

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