TSMC's Q4 Surge Underlines AI Boom, Yet Valuation and Margin Risks Loom

What happened

TSMC reported a significant jump in fourth-quarter profit, driven by surging AI chip demand, as highlighted in a recent news article. This aligns with the DeepValue master report's emphasis on AI/HPC as a key growth driver, supporting the company's raised 2025 revenue guidance into the mid-30% range. However, the report notes that TSMC's current stock price of $341.64 trades at 27.6x earnings, embedding high expectations for sustained mid-20s% growth and only modest margin compression. Critical risks include overseas fab dilution of 2-4% annually, which could pressure gross margins below the 56% long-term target despite strong sales. Thus, while Q4 results confirm near-term momentum, they do not address the valuation sensitivity and operational challenges outlined in the report.

Implication

The Q4 profit surge reinforces TSMC's position in the AI supply chain, yet investors must assess if growth can outpace the 25% CAGR target amid potential hyperscaler capex deceleration. With the stock above the $310 attractive entry point, new purchases carry higher risk unless a pullback occurs, as the current price reflects crowded optimism. Overseas fab expansion, while necessary for geopolitical diversification, introduces a structural margin drag that could erode profitability even with robust demand, requiring close monitoring of dilution trends. Key catalysts like 2nm ramp and 2026 guidance will be crucial to validate the investment thesis and justify current multiples. Ultimately, a disciplined approach focusing on entry points and risk management is advised, as the stock remains sensitive to any signs of AI demand softening or margin pressures escalating.

Thesis delta

The Q4 profit surge does not materially shift the investment thesis; it confirms the AI demand tailwind but leaves valuation and margin risks unchanged, maintaining TSMC as a potential buy only below $310. Investors should still monitor for signs of AI capex deceleration or overseas dilution exceeding the guided 2-4%, which would weaken the thesis. No new information alters the balanced risk-reward profile, with the stock's crowded trade and high expectations remaining key concerns.