Taiwan Semiconductor Valuation: How Realistic Is the Price?

Key Points

• Taiwan Semiconductor stock has been dragged lower in recent semiconductor volatility, yet valuation cases suggest it could rally by double-digits.
• Fundamentals show investors a great industry positioning along with high profitability to drive more interest in the business.
• Wall Street analysts are trending in a bullish direction for this company in the coming quarters.

Value is what an investor gets, and price is what that investor pays for an underlying asset or investment. When it comes to the stock market, prices are floated around every single day, yet only the best investors know which price range is worth considering as long as they understand the company’s current fair valuation.

This means understanding the financials and the potential growth behind the company and its business model inside a broader industry, which is where the points to be discussed today come into play. This time, investors will gain a better sense of the fair value of Taiwan Semiconductor Manufacturing NYSE: TSM stock today. This is an important factor to remember as the technology sector starts to swing in wild directions.

As the S&P 500 goes on a higher volatility cycle currently, bringing other big and meaningful names in the semiconductor space lower, such as NVIDIA Co. NASDAQ: NVDA, understanding where a fair valuation may be for a name like Taiwan Semiconductor stock is will give investors a massive advantage over the rest of the crowd that merely reacts to the daily price swings in the market.

The Foundations of Value in Taiwan Semiconductor Stock

Warren Buffett changed his career path when he figured out this one important factor. One day, he decided to focus on what he went to call a business “moat” in a company, which is essentially how protected it is from competition and other industry breakouts.

Investors can start to notice this moat in Taiwan Semiconductor by looking at the company’s 59% market share. This makes it the leader in advanced chip nodes, the same ones that companies like Apple Inc. NASDAQ: AAPL and NVIDIA exclusively buy from Taiwan Semiconductor today.

This heavy presence in the market gives the company the protection it needs, but the benefits don’t stop there for investors. This positioning allows Taiwan Semiconductor to generate up to 56.1% in gross margins over the past 12 months, speaking to the company’s pricing power due to its large positioning as a primary supplier.

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From this high profitability and stable position in the market, investors can start to build their valuation cases, but at the end of the day, there is only one metric that really matters in any investment, and that is how much money buyers can expect to get back from this business.

Taiwan Semiconductor’s Cash Machine

This metric can be gauged by following the returns on invested capital (ROIC) in the company, which are brought higher by the gross profit enabled by the company’s positioning and pricing power in the industry. This very setup in Taiwan Semiconductor stock delivers a net income margin of just over 40%, and that’s where the ROIC is born.

By retaining this large share from each sale, Taiwan Semiconductor management can then more effectively reinvest this retained capital into the business, essentially creating that snowball effect investors like Warren Buffett love.

All told, the ROIC for Taiwan Semiconductor stock stands at 20.3% today. This measure matters because annual stock price performance tends to match the long-term ROIC rate in the long run, creating a massive opportunity to compound wealth for those investors not in a rush to take their profits out of this company just yet.

The question now becomes whether all of these net positives are priced into today’s stock price or not so that investors can better time their potential purchases in the company. To answer this, an opinion from Wall Street analysts must be retrieved.

The Future of Taiwan Semiconductor’s Valuation

On a base case, these analysts now forecast up to $2.65 in earnings per share (EPS) for the fourth quarter of 2025, which is a net growth rate of 18.3% from today’s level of $2.24. Not only is this growth rate significant, but it is the key to figuring out how much this stock could be worth in the coming quarters.

Looking at historical price-to-earnings (P/E) valuations, Taiwan Semiconductor stock now trades at 21.3x to place it in the lower range of the spectrum. Now, assuming that this valuation goes back to the normalized 29.0x multiple, then these EPS forecasts could bring the stock to a valuation of up to $307.4 per share.

Of course this assumes that every quarter for the next 12 months brings on the same sort of EPS growth as forecasted today, which might be a bit too optimistic. To normalize this view, investors can look to the $255 price targets set by Barclays analysts as of January 2025, which seems to be the middle ground between normalized P/E multiples and EPS growth, implying a net upside of 45.3% from where it trades today.