Evaluating Taiwan Semiconductor's (TSM) Fair Value: Insights and Investment Considerations

Hi everyone, I wanted to share some thoughts on Taiwan Semiconductor (TSM) and how I'm thinking about valuation right now. Based on my assumptions, I estimate the fair value to be around $105 per share.

Here's a quick rundown of my key assumptions:

• Cost of capital of 12%

• Long-term growth rate of 3%

• Free cash flow margin topping out at 40%

• Industry growth of 50% CAGR through 2027

• TSM maintaining 80% market share in high-performance computing chip manufacturing

• Chip design houses like AMD and Nvidia pay out about 25% of COGS to TSM

Plugging those assumptions into a DCF model gets me to that $105 valuation. But there are upside and downside risks around the competitive dynamics.

On the upside, I think TSM's gross margins could exceed my estimate if they diversify beyond just AMD and Intel for HPC chips. If Nvidia's demand increases, for example, it may strengthen TSM's bargaining position.

The key downside risk I see is if Intel makes a comeback in HPC and takes some market share. If TSM's share of HPC drops to say 70%, my valuation would be around 18% lower all else equal.

Given the balanced risk-reward at current prices, I think TSM is a hold around $105. But I'm interested to hear if folks have different takes on the competitive dynamics here!