TSMC's AI-Fueled Revenue Beat Masks Persistent Cash Flow and Geopolitical Risks

What happened

TSMC reported stronger-than-expected fourth-quarter revenue, driven by robust AI chip demand that temporarily eased concerns about AI infrastructure overinvestment. However, the DeepValue report reveals a sharp deterioration in cash conversion during 2025, with operating cash flow falling 32% despite rising earnings, signaling potential working-capital strains. This disconnect highlights underlying financial pressures that could undermine free cash flow amid heavy capital expenditures for global fab expansions and 2nm node ramps. Market sentiment remains crowded, with the stock trading at premium valuations that already price in an AI utility outcome, overlooking cyclical downturns and unhedgeable Taiwan risks. Therefore, the revenue news offers short-term relief but does not alter the structural challenges or the WAIT rating for better entry points.

Implication

The strong revenue reinforces AI demand but does not mitigate the report's key risks, such as deteriorating cash conversion that may indicate unsustainable practices or rising costs. With TSMC's valuation at P/E ~28, any AI capex slowdown or margin compression from node transitions could trigger a re-rating toward the bear case of $230. Geopolitical tail risks, including Taiwan operational disruptions and export-control shocks, remain live threats not reflected in the crowded bullish sentiment. Cash flow trends need urgent scrutiny, as weak conversion could limit financial flexibility during the capital-intensive global build-out. Consequently, investors should maintain a WAIT stance, deferring additions until prices approach $260 or evidence emerges of durable AI bottlenecks and improved cash generation.

Thesis delta

The news does not shift the core investment thesis, which posits that TSMC is an overvalued cyclical business mispriced as an AI monopoly. It provides temporary validation of AI demand but lacks evidence on critical triggers like CoWoS utilization or N2 progress that would change the call. The thesis remains unchanged: await better risk-reward or clearer signs of structural margin and cash flow resilience.