TSMC's Pricing Power Confronts Capacity and Execution Risks in AI Era

What happened

TSMC's position as a technology leader in advanced semiconductor nodes and packaging is reinforced by strong financials and pricing power, driving optimism amid the AI boom. Recent filings confirm robust free cash flow and a net cash position, supporting double-digit earnings growth and strategic expansions. However, persistent constraints in advanced packaging capacity, such as CoWoS, threaten to limit near-term shipment growth despite aggressive expansion plans. Operational risks, including earthquake-related losses and competitive pressures, add uncertainty to the company's growth trajectory. Investors must balance TSMC's strengths against these execution challenges to assess its long-term viability.

Implication

TSMC's leadership in advanced nodes and packaging underpins its pricing power, but capacity constraints in CoWoS and HBM supply may cap AI-driven revenue upside in the short term. The company's excellent financial health, including high interest coverage and net cash, offers a cushion against setbacks, yet operational and geopolitical risks require vigilant oversight. Successful ramp of N2 technology and advanced packaging in 2025 could drive significant value, while delays might lead to a de-rating of the stock. Quarterly updates on capacity additions and roadmap adherence will be critical indicators of TSMC's ability to sustain growth. Overall, while the risk-reward profile favors long-term investors, short-term volatility from execution missteps or external shocks remains a concern.

Thesis delta

The new article bolsters the DeepValue 'BUY' thesis by highlighting TSMC's pricing power and profitability, but it does not meaningfully shift the investment case. Key risks around advanced packaging capacity and technology execution timelines remain unchanged and demand continued scrutiny. Investors should maintain a balanced perspective, leveraging the positive financial narrative while staying alert to potential bottlenecks that could undermine growth.