TSMC: Holding Our Fair Value Despite DeepSeek AI Disruption

Taiwan Semiconductor Manufacturing’s ADRs TSM tumbled 13% after China’s DeepSeek released its open-source reasoning model R1 that achieves capabilities on par with that of OpenAI and Google at a fraction of the latter’s costs.

Key Morningstar Metrics for Taiwan Semiconductor Manufacturing Co

• Fair Value Estimate: $273.00 / TWD 1,800
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What Impact DeepSeek’s Latest AI Model May Have

Why it matters: This affects sentiment as to TSMC’s earlier guidance of a mid-40s five-year AI revenue compound annual growth rate. DeepSeek’s model exacerbated concerns as to whether adding more computation power is the best way to improve models, and whether AI spending by the likes of Amazon and Microsoft is durable.

• We anticipate elevated short-term volatility to TSMC’s share price as cloud service and app developers leverage R1’s open-source nature to improve their own offerings. These efficiency gains may temporarily depress the demand for computation power.
• However, we believe TSMC will benefit from more durable AI spending in the long run, as more potent models improve the likelihood of profitable innovations, which incentivizes reinvestment. Another growth driver is cheaper models, which reduce barriers to entry and attract numerous smaller app developers.

The bottom line: We maintain our fair value estimate of TWD 1,800 per share ($273 per ADR) for TSMC. We see the stock as undervalued, and the share price pullback presents an entry opportunity for long-term investors.

• Our forecasts do not assume Chinese AI companies gain access to TSMC’s cutting-edge processes. We believe demand from the US and other Western countries is enough to support TSMC’s AI revenue growth for the next five years.

Big picture: TSMC is still supply-constrained. We foresee minimal effect on TSMC’s profitability as its factories should remain fully utilized in case of a mild reduction in AI investments.

• Meta’s surprisingly large 2025 capital spending budget and the Stargate venture’s USD 500 billion announcement support our view regarding strong AI investments in the long term.