TSMC's AI-Fueled Surge Meets Sobering Valuation and Risk Realities

What happened

TSMC's Q3 2025 revenue jumped 40.8% year-over-year to $33.1 billion, with a net margin of 45.7% and advanced nodes comprising 74% of wafer revenue, driven by its essential role in AI chip manufacturing. The company's leadership in 3nm volume production and on-track 2nm roadmap, alongside CoWoS packaging, reinforces its dominance amid booming demand for AI accelerators. However, the DeepValue master report highlights that TSMC's shares have risen approximately 51% over 12 months to trade at around 26x P/E, pricing in much of the AI growth story and leaving little room for error. Significant risks persist, including semiconductor cyclicality, high capital expenditures for costly overseas fabs, and concentrated exposure to Taiwan's geopolitical and export-control tensions. Thus, while operational strength is evident, the valuation and underlying uncertainties suggest a balanced risk-reward that warrants investor patience.

Implication

TSMC's robust Q3 2025 results confirm its operational excellence and AI-driven growth, but the stock's premium valuation at ~26x P/E discounts much of this optimism, limiting near-term upside. Geopolitical risks, such as Taiwan tensions and U.S.-China export controls, could abruptly disrupt demand or operations, posing material threats not fully priced in. The high costs of overseas fab expansions in Arizona, Japan, and Germany may pressure returns if execution stumbles or subsidies prove insufficient. Semiconductor cyclicality means current high utilization and margins are vulnerable to downturns, potentially compressing earnings in a slowdown. Therefore, investors are better served waiting for a pullback or improved risk indicators before adding exposure, despite TSMC's strong fundamentals.

Thesis delta

The new article reinforces TSMC's near-term growth with updated Q3 2025 data, but it does not alter the core thesis of elevated valuation and unmitigated risks identified in the DeepValue report. Key concerns—such as geopolitical exposure, overseas fab economics, and cyclicality—remain unchanged, maintaining the recommendation for a cautious 'wait' stance. Investors should continue monitoring the N2 ramp and geopolitical developments for any material shifts that could justify a more bullish view.