Taiwan Semiconductor Manufacturing Company Limited (TSM): Our Calculation of Intrinsic Value

Company Profile - Taiwan Semiconductor Manufacturing Company Limited (TSMC) is the world's leading dedicated semiconductor foundry, manufacturing advanced logic chips for various sectors including data centers, AI accelerators, smartphones, PCs, automobiles, and industrial electronics [1] - TSMC's competitive advantages stem from its process leadership, scale advantages, customer diversity, and technological roadmap, which are difficult to replicate [1] - The company consistently generates strong cash flows across business cycles, supported by long-term structural demand for computation and advanced node capacity [1] DCF Analysis - The DCF model uses a discount rate of 10% and a terminal growth rate of 3% [2] - Forecasted free cash flows (FCF) from 2025 to 2029 are projected to grow from $4.6 billion to $6.2 billion, with a total present value of FCFs amounting to $20.3 billion [2] - The terminal value, calculated using the perpetuity growth model, is estimated at $91.2 billion, with a present value of the terminal value at $56.6 billion [2] Valuation Metrics - The enterprise value is calculated to be $76.9 billion, with net debt approximated at -$58 billion, leading to an equity value of $134.9 billion [3] - The intrinsic value per share is estimated at approximately $5.21, translating to about $26.05 per American Depositary Receipt (ADR) [3] Market Comparison - The DCF value of TSMC is around $26 per ADR, while the current market price is approximately $339 per ADR, indicating a margin of safety of -92% [4] - The current market valuation reflects expectations significantly above the conservative intrinsic value, driven by premium assumptions regarding AI-driven demand, margin expansion, capital returns, and geopolitical scarcity value [5] Investment Outlook - TSMC is viewed as a dominant player in a structurally growing industry, with strong manufacturing capabilities and durable competitive advantages [6] - However, the stock currently offers limited margin of safety, suggesting that future returns may rely more on continued execution and industry tailwinds rather than multiple expansion [6]