TSMC’s 110% rally draws caution, even from the bulls

The rapid ascent in Taiwan Semiconductor Manufacturing Co. is making it harder to ignore risks for the world’s largest contract chipmaker, even for its staunchest supporters.

TSMC’s shares have surged more than 110% from an October 2022 low amid the global investor mania over artificial intelligence, tracking gains in key customer Nvidia Corp. Although AI-related revenue accounted for just 6% of TSMC’s total revenue last year, the market has been pricing in a big jump in that figure on the promise of an explosion in demand.

The stock’s relative strength index has been in overbought territory for much of the past two months, signaling the rally has gone too far, too fast. It’s also surged to its biggest premium on record over the average analyst price target.

Morningstar Inc. analyst Phelix Lee has one of the street’s highest targets, but admits some nervousness over how long AI growth can remain at elevated levels.

‘If I look at the order book, I would be a little bit concerned of how sustainable the AI demand is across the time span of three to five years, because you can’t really spend several tens of billions on data centers every single year,’ Lee said.

TSMC in January said its AI revenue is growing at 50% annually and should comprise somewhere in the ‘high-teens’ by 2027. The company is building plants in the US, Japan and Germany as it races to supply needs for AI chips used in data centers operated by global powerhouses including Amazon.com Inc. and Microsoft Corp.

Geopolitical concerns cloud the outlook, given Washington-Beijing trade tensions and the possible impact of this year’s US presidential election. Morningstar’s Lee said it’s unclear whether TSMC’s strong order book has been powered mainly by end-demand for AI products or inventory stocking by American clients looking to hedge policy uncertainty.