Image Source: Pixabay
 

Each week we run a DCF (Discounted Cash Flow) model on a company from our watchlist. This week’s pick: Taiwan Semiconductor Manufacturing Company Limited (TSM).
 

Profile

Taiwan Semiconductor Manufacturing Company Limited (TSMC) is the world’s leading dedicated semiconductor foundry, manufacturing advanced logic chips used across data centers, AI accelerators, smartphones, PCs, automobiles, and industrial electronics. The company’s process leadership, scale advantages, customer diversity, and technological roadmap create durable competitive advantages that are difficult to replicate. While the semiconductor industry is cyclical and capital-intensive, TSMC consistently generates strong cash flows across business cycles supported by long-term structural demand for computation and advanced node capacity.
 

DCF Analysis

Inputs

Discount Rate: 10%
Terminal Growth Rate: 3%
WACC: 10%

Forecasted Free Cash Flows (USD)

2025: $4.6 → PV: $4.2
2026: $5.0 → PV: $4.1
2027: $5.4 → PV: $4.1
2028: $5.8 → PV: $4.0
2029: $6.2 → PV: $3.9

Total Present Value of FCFs = $20.3B

Terminal Value Calculation (USD)

Using the perpetuity growth model with 2029 FCF = $6.2B:

TV = (6.2 × 1.03) ÷ (0.10 − 0.03) = $91.2B

Present Value of Terminal Value:

PV(TV) = 91.2 ÷ (1.10)^5 = $56.6B

Enterprise Value (USD)

Enterprise Value = $20.3B + $56.6B = $76.9B

Net Debt (USD)

Cash & Equivalents: ~$85B
Total Debt: ~$27B

Net Debt ≈ –$58B

Equity Value & Per-Share Value (USD)

Equity Value: $76.9B + $58B = $134.9B
Shares Outstanding: ~25.9B

Intrinsic Value per Share ≈ $5.21

(ADR represents 5 shares → ≈ $26.05/ADR)

Conclusion

DCF Value: ~$26/ADR
Current Price: ~$339/ADR
Margin of Safety: –92%

TSMC remains a strategically critical semiconductor franchise with world-class manufacturing capabilities, strong structural demand drivers, and durable competitive advantages in process technology and scale. Its ability to consistently generate cash through semiconductor cycles supports long-term investment appeal.

However, under a standardized DCF framework using a 10% discount rate and 3% terminal growth, the current market price implies expectations significantly above conservative intrinsic value. The valuation reflects premium assumptions about AI-driven demand for advanced nodes, margin expansion, capital returns, and geopolitical scarcity value.

For long-term investors, TSM represents a dominant player in a structurally growing industry. At today’s valuation, however, the stock offers limited margin of safety, suggesting future returns are likely to be driven more by continued execution and industry tailwinds than by multiple expansion.

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