TSM Analysis: The $1.9 Trillion Chip Foundry Trades Within 3% of Its All-Time High — Why TSMC's 62% Gross Margins and AI Tailwinds Justify a 35x Multiple

At $370.54 per ADR, TSMC trades at 35.2x trailing earnings, 7.4x book value, and an enterprise value of roughly 51x EBITDA. By any conventional metric, this is an expensive stock. The semiconductor industry average P/E sits closer to 25x, and TSMC's own five-year average is roughly 22x.

But conventional semiconductor valuations may not apply to TSMC. The company's competitive moat — measured by the 90%+ share of advanced node production — creates a pricing power dynamic more akin to a luxury goods company than a cyclical chipmaker. Customers literally cannot go elsewhere for cutting-edge fabrication. Samsung Foundry remains years behind on yield rates, and Intel Foundry Services is still ramping its first external orders.

The price-to-earnings-growth (PEG) ratio tells a more nuanced story at 1.68, suggesting the stock is not wildly stretched relative to its growth trajectory. Analyst estimates project 2027 quarterly EPS averaging NT$140 or higher, implying roughly 45% earnings growth over the next two years. At the current price, TSMC trades at approximately 22-24x projected 2027 earnings — a more reasonable multiple for a company growing at this pace.

The dividend yield of 0.32% is negligible for income investors, though the payout ratio of just 25.6% leaves substantial room for increases. TSMC has historically prioritised reinvestment over shareholder returns, and given the current capex cycle, that approach makes strategic sense.

TSMC's 2025 earnings trajectory tells the story of AI demand translating directly into financial results. Revenue climbed sequentially every quarter: NT$839 billion in Q1, NT$934 billion in Q2, NT$990 billion in Q3, and NT$1.056 trillion in Q4. Full-year 2025 revenue reached approximately NT$3.82 trillion ($117.5 billion), up 33% from 2024.

More importantly, profitability is expanding alongside revenue. Gross margins widened from 58.8% in Q1 to 62.3% in Q4, driven by higher advanced node utilisation and favourable pricing on AI-related orders. Operating margins followed the same trajectory, rising from 48.5% to 53.9%. Net profit margins hit 48.3% in Q4 — meaning TSMC keeps nearly half of every dollar of revenue as profit.

Q4 2025 diluted EPS came in at NT$98.45 per share, up from NT$69.7 in Q1. On a USD ADR basis, trailing twelve-month EPS is $10.54. The sequential acceleration in earnings per share — NT$69.7 to NT$76.8 to NT$87.2 to NT$98.4 — reflects not just revenue growth but genuine operating leverage as the company's fixed-cost fabrication plants operate at increasingly high utilisation rates.

Full-year 2025 net income reached NT$1.72 trillion ($53 billion), a 48% increase over 2024's NT$1.17 trillion. This was the fastest annual profit growth TSMC has posted since the post-pandemic semiconductor shortage in 2022.

TSMC's balance sheet is among the strongest in the global semiconductor industry. As of Q4 2025, the company held NT$2.76 trillion ($85 billion) in cash and equivalents against a debt-to-equity ratio of just 0.18. The current ratio of 2.62 provides ample liquidity, and working capital stands at NT$2.36 trillion.

Full-year 2025 operating cash flow reached NT$2.38 trillion ($73.3 billion), up 31% from 2024's NT$1.83 trillion. Capital expenditure consumed NT$1.29 trillion ($39.6 billion), leaving free cash flow of NT$1.10 trillion ($33.8 billion) — a 26% increase from 2024's NT$870 billion.

The capex-to-revenue ratio of 41% in Q4 underscores the sheer scale of TSMC's reinvestment programme. The company is simultaneously building advanced fabrication plants in Arizona (for US government and Apple contracts), Kumamoto, Japan, and expanding capacity in Taiwan. This is a company that must spend aggressively to maintain its technological lead — but it generates more than enough cash to fund that spending internally.

The net debt position is actually negative — TSMC has more cash than debt. Net debt to EBITDA stands at -2.36x, meaning the company could theoretically pay off all debt and still have over two years of EBITDA in cash remaining. Dividends consumed NT$472 billion in 2025, well covered by the NT$1.10 trillion in free cash flow, leaving substantial excess capital for continued reinvestment or potential shareholder return increases.

TSMC's competitive position is arguably the strongest of any technology company in the world. The company operates as a pure-play foundry — it designs no chips of its own, which means it competes with none of its customers. This business model has created an extraordinary flywheel: the best chip designers (Apple, Nvidia, AMD, Qualcomm, Broadcom) send their most advanced designs to TSMC, which uses the revenue to invest in next-generation process technology, which attracts even more designers.

The AI revolution has supercharged this dynamic. Nvidia's H100 and H200 AI accelerators, which have driven the $650 billion data centre buildout, are manufactured exclusively by TSMC on its advanced 4nm and 5nm nodes. Apple's M-series chips, AMD's EPYC server processors, and Broadcom's custom AI accelerators for Google and Meta are all TSMC-fabricated. When hyperscalers spend $200 billion on AI infrastructure in a single year, a substantial portion flows through TSMC's fabs.

The company's technology roadmap reinforces this dominance. TSMC began volume production of its N2 (2nm) process in late 2025, with further refinements (N2P, A14) planned through 2027. Each node shrink improves performance and power efficiency, making TSMC's process technology essential for the next generation of AI chips that will power larger language models and autonomous systems.

Samsung Foundry, the only other company capable of sub-5nm production, has struggled with yield issues that have pushed key customers like Qualcomm to shift more orders to TSMC. Intel's foundry ambitions under the CHIPS Act funding remain years from commercial viability at the leading edge. For the foreseeable future, TSMC has no true peer competitor in advanced semiconductor manufacturing.

Analyst consensus estimates project continued strong growth through 2027. Quarterly revenue estimates for 2027 range from NT$1.37 trillion in Q1 to NT$1.69 trillion in Q4, implying a full-year 2027 revenue run rate of approximately NT$6.15 trillion — a 61% increase over 2025's NT$3.82 trillion.

EPS estimates for 2027 average NT$140 per quarter, suggesting annual EPS in the range of NT$550-560. At the current ADR price, this implies a forward P/E of roughly 22-24x on 2027 estimates, which is more palatable than the headline 35x trailing multiple.

The next earnings report is scheduled for April 16, 2026, which will cover Q1 2026 results. The market will be watching closely for any signs that AI-related order momentum is decelerating. TSMC's monthly revenue disclosures — a unique transparency practice among chipmakers — will provide earlier signals of demand trends.

Key catalysts ahead include the continued ramp of N2 (2nm) production, progress on the Arizona fab (which has geopolitical significance for US-Taiwan relations), and the pace of AI infrastructure spending by hyperscalers. The new 10% US tariff introduced by the Trump administration adds a layer of uncertainty, though TSMC's US manufacturing presence may partially insulate it from further trade restrictions.

Risks are concentrated in three areas: a slowdown in AI capex spending (which would directly impact advanced node utilisation), geopolitical tension over Taiwan, and the massive capital investment required to maintain the technology lead. The capex-to-revenue ratio of 34-41% means any revenue shortfall would compress free cash flow significantly.

No analysis of TSMC is complete without addressing the geopolitical elephant in the room. The company manufactures the vast majority of the world's advanced semiconductors on an island that China considers part of its sovereign territory. Any military conflict or economic blockade involving Taiwan would create the most severe supply chain disruption in modern history.

TSMC has taken concrete steps to diversify its geographic footprint. The Arizona fab, built with support from the US CHIPS Act, is expected to produce 4nm and 3nm chips for US customers. A second Arizona fab is planned. The Kumamoto, Japan fab is operational for mature-node production. A European fab in Dresden, Germany, is in early development.

However, these overseas fabs collectively represent a small fraction of TSMC's total capacity. The most advanced process technologies — N2 and beyond — will remain in Taiwan for the foreseeable future. This geographic concentration is a structural risk that cannot be fully mitigated, and it partly explains why TSMC trades at a discount to its intrinsic technological value.

For investors, this risk is best understood as a low-probability, catastrophic-impact scenario. The global economic consequences of a Taiwan crisis would be so severe — estimated at $2-4 trillion in annual GDP losses — that it serves as a mutual deterrent. But it is not zero, and any escalation in cross-strait tensions can trigger sharp selloffs in TSM shares regardless of the underlying fundamentals.