TSMC's strong performance cannot hide the crisis, as it is being surrounded by the dual threats of "overvaluation" and "pursuers."

According to Zhitong Finance APP, Taiwan Semiconductor (TSM.US) has grown to become the world's largest foundry, with a valuation exceeding $1 trillion, while competitors Samsung and Intel (INTC.US) are significantly lagging behind. Although it was previously suggested to postpone investments due to anticipated intensified competition, the actual competitive progress has been slower than expected. Taiwan Semiconductor has achieved substantial revenue and profit growth thanks to its key position in the wave of artificial intelligence. However, considering its high valuation and multiple risks, it is currently not an ideal investment target.

Revenue Growth but Profit Decline

From the latest financial performance, Taiwan Semiconductor's consolidated revenue is approximately NT$933.79 billion (about RMB 228.03 billion), with a net profit after tax of approximately NT$398.27 billion (about RMB 97.26 billion), and earnings per share of NT$15.36.

With a significant increase in customer demand, Taiwan Semiconductor's revenue this quarter has grown by over 40% year-on-year. The gross profit margin has also increased by more than 5 percentage points, indicating enhanced product pricing power; wafer shipments increased by 19%, pushing the net profit margin close to 43%. Although the strengthening of the NT dollar against the US dollar has put some pressure on profits denominated in NT dollars, overall cash flow remains robust. However, sequential data reveals signs of slowing demand: both gross profit margin and net profit margin have declined sequentially, indicating increased difficulty in continuing price hikes.

Performance of Semiconductor Segments

Segment performance shows that Taiwan Semiconductor is continuously expanding its business through advanced processes. This quarter, 24% of revenue came from 3nm technology, and 36% from 5nm technology; although the share of 7nm technology has decreased, actual revenue remains stable. Leveraging existing wafer fab capacity, the company has maintained stable revenue from other processes while continuing to grow revenue from advanced technologies.

From a business structure perspective, high-performance computing (HPC) remains a core pillar, accounting for over 60% and achieving double-digit growth year-on-year. However, this also implies potential risks, as the sustainability of AI demand is difficult to predict in the long term. If some demand stems from companies "following the trend" rather than actual applications, it could severely impact Taiwan Semiconductor's ability to continue delivering shareholder returns.

Cash Flow Situation

In terms of cash flow, the company's operating cash flow for this quarter reached NT$500 billion (approximately US$16 billion), with a dividend yield of only 1.2%. Although this is sufficient to cover dividends, capital expenditures reached US$9.4 billion. Capital expenditures are expected to reach US$40 billion in 2025, which, based on this estimate, results in an annualized free cash flow (FCF) of approximately US$25 billion, with a free cash flow yield of less than 3%.

Despite a slight decrease in cash balance this quarter, the financial situation remains stable, but there are still concerns about shareholder return capabilities. The company expects revenue for the next quarter to reach US$32.5 billion, showing good sequential growth, but gross margin is expected to decline by about 2 percentage points, and operating profit margin is expected to decrease by 3 percentage points. In addition to the impact of the New Taiwan Dollar strengthening, this also reflects a weakening profit growth momentum.

Peer Challenges

On the competitive front, risks are gradually emerging. Intel is advancing the mass production of the 18A process node, aiming to achieve this by the end of the year, while continuing to expand capacity and emphasizing that it will not adjust the 14A process without significant external orders. Considering that companies generally wish to retain supply chain options, Intel is likely to secure related contracts. Samsung is accelerating the development of its 2-nanometer process, planning to complete it by the end of the year, and is expected to become the first company in the U.S. with this capability. Since the U.S. is the largest market for custom chips, Taiwan's "silicon shield" advantage is facing challenges from U.S. protectionist policies and a shift towards domestic manufacturing. If Samsung establishes 2-nanometer capacity in the U.S., it may exert pressure on TSMC's profit margins through scale expansion.

Conclusion

The core risks currently faced by TSMC are twofold: first, valuations are at a high level, and combined with the capital-intensive nature of the business, the free cash flow yield has fallen to single-digit lows; second, Intel and Samsung are investing heavily to catch up, planning to achieve key process breakthroughs within the year, which may trigger a new round of competition and compress profit margins.

Although TSMC remains the largest foundry in the world and maintains a unique supply position in the advanced chip sector, investors should pay close attention to the aforementioned risks