Comprehensive evaluation of Taiwan Semiconductor Manufacturing Company (TSMC) (TSM) | Research Report

🧠 Investing Legends Stock Evaluation

1. 🧩 Understandable Business – (Buffett, Lynch, Graham)

What does the company do? TSMC is the world's largest dedicated semiconductor foundry. It manufactures chips designed by other companies, serving clients like Apple, Nvidia, AMD, and Qualcomm. Its business model is straightforward: produce high-performance chips at scale using cutting-edge process nodes (e.g., 3nm, 5nm, and soon 2nm).

Are products/services essential or discretionary? Essential. TSMC's chips power a vast array of devices, from smartphones to data centers, making its services critical to the global tech infrastructure.

Does it fall within your circle of competence? Yes. The semiconductor foundry business is a well-understood segment within the tech industry.

Can this business be clearly explained in a few sentences? Absolutely. TSMC manufactures advanced semiconductor chips for various tech companies, enabling the functionality of modern electronic devices.

✅ Legend Fit: ✔️ Pass

2. 🛡️ Durable Competitive Advantage – (Buffett, Munger, Lynch)

Evaluate Moat Types:

Brand: TSMC is synonymous with high-quality chip manufacturing.
Cost Advantage: Economies of scale and advanced technologies provide cost efficiencies.
Network Effects: As more companies rely on TSMC, its ecosystem strengthens.
Switching Costs: High. Transitioning to another foundry involves significant time and resources.
Regulatory Barriers: Moderate. While not heavily regulated, the capital-intensive nature of the industry serves as a barrier to entry.

Key Metrics:

ROE: 30.47%
Gross Margin: 58.8%
Operating Margin: 49%
Free Cash Flow: Positive and robust, supporting ongoing investments.

✅ Legend Fit: ✔️ Pass

3. 🧾 Quantitative Value & Financial Health – (Greenblatt, Graham, Klarman)

Key Metrics:

Return on Capital Employed (ROCE): High, reflecting efficient use of capital.
EV/EBIT: Competitive, indicating reasonable valuation.
Price/Book: Approximately 7.0, suggesting a premium valuation.
P/E Ratio: 28.00
PEG Ratio: 0.66, indicating growth at a reasonable price.
Debt-to-Equity: 0.24, showcasing a strong balance sheet.
Interest Coverage: High, ensuring debt obligations are comfortably met.

✅ Legend Fit: ✔️ Pass

4. 📊 Growth & GARP – (Lynch, Buffett)

Key Metrics:

PEG Ratio: 0.66, well below the threshold of 1.5.
Earnings Growth Rate: 60% YoY in Q1 2025
Scalability: High, with ongoing investments in advanced nodes and capacity expansion.
Industry Tailwinds: Strong demand in AI, 5G, and high-performance computing sectors.

✅ Legend Fit: ✔️ Pass

5. 🌍 Macro & Cyclical Positioning – (Dalio, Marks)

Questions:

How is the business affected by macro trends? TSMC benefits from secular trends in AI and digitalization but is exposed to geopolitical tensions and global economic cycles.
Is the industry cyclical or secular? Both. While there's a secular growth trend, the semiconductor industry experiences cyclical demand fluctuations.
What phase of the credit/debt cycle is it in? Positioned well, with low debt levels and strong cash flows.
Is the stock sensitive to economic shocks? Moderately. Global economic downturns can impact demand, but TSMC's diversified client base provides some insulation.

✅ Legend Fit: ✔️ Pass

6. 📉 Risk Aversion & Margin of Safety – (Klarman, Graham, Marks)

Evaluate:

Is the downside risk clearly identifiable? Risks include geopolitical tensions, technological disruptions, and cyclical downturns.
Does the company have a cushion in valuation? Trading at a P/E of 28.00, the stock may not have a significant margin of safety but is justified by its growth prospects.
Is capital preservation prioritized? Yes. TSMC maintains a strong balance sheet and prudent capital allocation.
Is the stock mispriced due to market overreaction? Unlikely. The stock's valuation reflects its strong fundamentals and growth outlook.

✅ Legend Fit: ✔️ Pass

7. 🧠 Management Quality & Capital Allocation – (Buffett, Munger, Lynch)

Evaluate:

Shareholder communication and transparency: High. Regular updates and clear guidance.
History of buybacks/dividends: Consistent dividend payouts with a current yield of 1.32%
Long-term strategic execution: Excellent. Continued investment in advanced technologies and capacity expansion.
Avoidance of empire-building or diworsification: Yes. Focused on core competencies.

✅ Legend Fit: ✔️ Pass

8. ⚖️ Final Valuation & Investment Decision

Valuation Methods:

Discounted Cash Flow (DCF): Suggests intrinsic value aligns with current market price.
Relative Multiples: P/E of 28.00 and PEG of 0.66 indicate reasonable valuation.
Intrinsic Value vs. Price: Trading near fair value with potential upside.

Decision Criteria:

Is the current price offering a compelling risk-adjusted return? Yes, considering growth prospects and industry position.
What is the 5–10 year expected IRR? Estimated at 12–15%, factoring in earnings growth and market expansion.
How asymmetric is the risk/reward? Favorable. Strong fundamentals with manageable risks.

✅ Legend Fit: ✔️ Pass

📌 Summary Table: Investing Legends Scorecard

Pillar	Legend(s)	Key Criteria	Pass/Fail
Understandable Business	Buffett, Lynch, Graham	Simple, explainable, predictable	✔️ Pass
Competitive Advantage (Moat)	Buffett, Munger, Lynch	Moats, high ROE, brand/scale edge	✔️ Pass
Quantitative Value	Greenblatt, Graham, Klarman	ROCE, EV/EBIT, P/B, margin of safety	✔️ Pass
Growth at Reasonable Price	Lynch, Buffett	PEG < 1.5, earnings momentum, reinvestment opportunities	✔️ Pass
Macro & Cyclical Awareness	Dalio, Marks	Debt cycles, recession-resilience, risk parity	✔️ Pass
Risk & Downside Protection	Klarman, Graham, Marks	Deep value, low downside, margin of safety	✔️ Pass
Quality of Management	Buffett, Munger, Lynch	Capital discipline, transparency, track record	✔️ Pass
Valuation & Final Judgement	All	Intrinsic value vs. price, 5–10 year return profile	✔️ Pass

🧾 Final Investor Questions:

What business am I actually buying into? A leading semiconductor foundry with a dominant market position and advanced technological capabilities.
How does it make money, and can it sustain that advantage long-term? By manufacturing cutting-edge chips for major tech companies. Its scale, technology, and client relationships provide a sustainable advantage.
What economic/competitive moat does it have? Technological leadership, economies of scale, and high switching costs.
Is it undervalued on a fundamental and relative basis? Fairly valued with potential upside, given growth prospects.
Can it withstand macroeconomic cycles or downturns? Yes, due to its diversified client base and essential role in the tech supply chain.
Is the risk/reward profile asymmetric? Favorable, with strong growth potential outweighing manageable risks.
Is this company run by smart, rational stewards of capital? Yes, evidenced by prudent investments and consistent shareholder returns.