Earthquake Exposes TSMC's Recurring Operational Vulnerability Amid High Valuations

What happened

A recent earthquake has impacted TSMC's Taiwan-based facilities, raising immediate concerns about production disruptions and potential financial losses, as reported by Benzinga. This event echoes past incidents highlighted in TSMC's 2024 and 2025 filings, which note earthquakes causing approximately TWD 8.3 billion in losses, underscoring a persistent operational risk in a region prone to natural disasters. TSMC, with over 34% market share in advanced foundry nodes, serves as a critical supplier for AI and smartphone chips, meaning any downtime could ripple through global tech supply chains. The company has been enjoying robust revenue growth, around 30% in 2025 driven by AI demand, but this earthquake threatens short-term performance and exacerbates existing risks like geopolitical tensions and overseas fab execution challenges. Despite strong financials, including a net cash balance sheet and high margins, the concentration of advanced manufacturing in Taiwan leaves TSMC vulnerable, potentially testing investor patience after a 46% stock surge over the past year.

Implication

The earthquake could lead to immediate revenue shortfalls and increased costs from equipment damage and lost wafer output, directly impacting TSMC's financials in the coming quarters. Given TSMC's high customer concentration—with top clients like Nvidia and Apple dependent on timely shipments—disruptions might delay key product launches and strain relationships, affecting long-term contract stability. Historically, such events have proven costly, and with the stock trading at a premium P/E of 25.5x after a 46% run-up, there's limited margin for error, making the company susceptible to negative sentiment shifts. This incident amplifies the operational risks outlined in filings, including earthquakes, droughts, and power issues, which could hinder TSMC's ability to maintain >50% gross margins and complicate overseas expansion efforts. Long-term, while TSMC's technological moat remains intact, investors must critically assess whether the current price adequately discounts these heightened risks, especially as geopolitical and cycle pressures loom.

Thesis delta

The earthquake news does not alter TSMC's core long-term thesis of technological leadership and AI-driven growth, but it sharply increases the near-term risk profile by highlighting operational vulnerabilities already flagged in filings. This reinforces the cautious 'POTENTIAL BUY' stance from the DeepValue report, suggesting that the margin of safety has narrowed further due to potential financial impacts and sentiment deterioration. If damage assessments reveal significant production delays or costs exceed historical levels, it could trigger a shift toward 'WAIT' or 'POTENTIAL SELL,' aligning with the report's watch items on geopolitical and operational risks.