Taiwan Semiconductor Stock: A Highly Risky, Low-Risk Investment

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Can an investment be low-risk and very risky at the same time? It’s entirely possible when a chipmaking behemoth like Taiwan Semiconductor Manufacturing (NYSE:TSM) controls so much of its niche market — and when there are geopolitical flash points that could erupt at any given moment.

This isn’t a call to hoard gold bars and canned goods over fears of international turmoil. Rather, it’s an invitation to consider how a seemingly risk-free asset like TSM stock could concurrently be the most and least conservative investment one could make.

The rarely mentioned giant

In the U.S. and possibly elsewhere, the most talked-about artificial intelligence-compatible hardware manufacturer is NVIDIA (NASDAQ:NVDA). Yet, from a global perspective, there’s a company that’s just as dominant as NVIDIA in its specific niche market, if not more so.

Of course, I’m referring to Taiwan Semiconductor. American investors like to talk about NVIDIA, Advanced Micro Devices (NASDAQ:AMD) and occasionally, Intel (NASDAQ:INTC). However, perhaps because the company is located in far-away Taiwan, the conversation doesn’t usually revolve around Taiwan Semiconductor.

What U.S.-based stock traders sometimes overlook is Taiwan Semiconductor’s astounding size and market share. According to Pictet Asset Management (via Bloomberg), the company’s share of the global manufacturing market for advanced semiconductors used for AI applications exceeds 90%.

Furthermore, Taiwan Semiconductor currently has a market capitalization of around $717 billion. This dwarfs AMD’s market cap of approximately $310 billion, although AMD is more of a darling on Wall Street than Taiwan Semiconductor.

This isn’t to suggest that nobody ever talks about Taiwan Semiconductor, but it just doesn’t seem to be the center of attention on “fintwit” (financial social media”) or in the mainstream financial press. Thus, it’s worth considering if there could be a low-risk, high-probability investment opportunity with TSM stock.

Taiwan Semiconductor’s GAAP-measured, trailing 12-month price-to-earnings (P/E) ratio of 22.6 is more favorable than the sector median P/E ratio of 29.55. Moreover, the company’s P/E ratio is definitely lower than those of NVIDIA (73.63), Intel (106.6) and AMD (an eye-watering 361.09).

This sounds like a no-brainer for risk-averse, value-conscious investors. Taiwan Semiconductor actually produces its own chips (not every so-called “chipmaker” does this). Additionally, the company is consistently profitable and has an excellent track record of beating analysts’ consensus quarterly EPS estimates.

In fact, analysts are almost unanimously bullish about TSM stock. For instance, as reported by Yahoo! Finance, Bank of America analysts recently raised their price target from $760 to $880 and reiterated their Buy rating on Taiwan Semiconductor stock, citing “increased demand for advanced materials produced by” the company.

The big risk for a low-risk chipmaker

Frankly, I could go on and on about the bullish argument for investing in Taiwan Semiconductor. Just to sweeten the deal, the company offers a forward annual dividend yield of 1.49%. That might not sound huge, but it’s pretty good for a mega-cap technology company in the 2020s.

To make the stock seem even more de-risked, Taiwan Semiconductor is reportedly considering building advanced chip-packaging capacity in Japan. Clearly, the company wouldn’t think about doing this if the demand wasn’t there.

Speaking of demand, Taiwan Semiconductor also announced that it’s “planning additional advanced packaging capacity in Chiayi in southern Taiwan to respond to strong market demand,” according to Reuters.

However, before you run out and buy TSM stock as a seemingly fail-safe asset, bear in mind that the company faces a veritable powder keg of geopolitical risk. That’s because China could ramp up military operations and/or launch a takeover mission in Taiwan at any given moment.

Just a few years ago, it was unthinkable that Russia would invade Ukraine, but that’s exactly what happened. Nations don’t necessarily signal their intentions to attack another country before they actually fire off the first shot or start putting boots on the ground.

Of course, military escalations in or near Taiwan would have broader implications than putting pressure on TSM stock. Supply chains would become more constrained than they already are, and some nations would feel compelled to respond with economic sanctions and/or other measures.

Still, it might not take all-out war for Taiwan Semiconductor stock to crater. Cross-national tensions can arise and manifest themselves in subtler ways. Geopolitics is always complicated, and so is international investing.

Thus, maybe TSM stock isn’t simply a no-brainer investment. It’s obvious in some ways but impenetrably complex in others. Perhaps the best move then is just to hold a few Taiwan Semiconductor shares and hope that peace and prosperity prevail.

Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.