TSMC stock: Assessing the Trump risk

Investing.com -- The Taiwan Semiconductor Manufacturing (NYSE:TSM) (TSMC) has become a focal point in the semiconductor industry, both for its technological leadership and its position within global supply chains. However, recent political developments in the United States, especially remarks by former President Donald Trump, have raised potential risks for TSMC stock.

Trump's re-election campaign emphasizes reducing reliance on foreign semiconductor manufacturers, including TSMC, which could pose challenges for the company.

Trump's tariff threat and possible TSMC stock impact

TSMC stock is particularly vulnerable to Trump’s recent calls for higher tariffs on foreign semiconductor manufacturers.

Trump has highlighted the need for the US to strengthen its own semiconductor production, reducing its dependence on overseas manufacturers like TSMC. If he follows through on these proposals, TSMC could face raised tariffs under a reevaluation of the CHIPS Act, which would affect its cost structure and supply chain.

While over 60% of TSMC’s revenue comes from US clients, much of its chip production is used in electronic products assembled outside the US For instance, many products, including the iPhone and AI data centers, are assembled in non-US locations.

“For most of the cases, TSMC does not ship chips directly into the US market,” Citi analysts led by Laura Chen said in a note.

“If applying tariff based on the semiconductor content of imported finished products, that would require complex audits across thousand of devices, which contain a variety of chips. We would expect increasing cost across the technology supply chain.”

Despite these risks, Citi highlights that TSMC's fundamentals remain robust. The company's Arizona fab expansion, supported by a $6.6 billion subsidy from the CHIPS Act, is on track, with mass production expected to begin in 2025.

“TSMC has announced that its N4 mass volume production would start from 2025 with capacity at 20kwpm,” Citi analysts highlight.

“The second and third fab are underway. As its yield rate has been significantly improved to similar level as its Taiwan fab, despite the rising overseas cost, we believe the margin dilution is manageable.”

Moreover, demand for AI data centers and edge AI devices remains strong, contributing to solid earnings growth for TSMC into the next year. The note forecasts a 30% year-on-year growth in this segment.

“Structural gross margin upward trend is supported by its yield rate improvement and better utilization rate,” analysts said.

“Despite rising concerns on geopolitical tension and further US restriction on China post-election, considering TSMC’s solid execution and robust KYC system internally and externally with the US Department of Commerce, we believe the uncertainties at TSMC should be well managed,” they added.

Citi maintained a Buy rating on TSMC stock, with a price target of NT$1,540, implying a nearly 47% return.

The chipmaker’s shares have recently surged to an all-time high, driven by its stronger-than-expected third-quarter earnings and optimistic projections driven by rising demand for AI technology.