TSMC's Growth Momentum and AI Impact Analysis

Key Factors Driving TSMC's Growth Momentum

TSMC's growth momentum is primarily driven by its critical role in advanced chip manufacturing and surging demand from the artificial intelligence (AI) sector.

Dominance in Advanced Process Nodes: TSMC is the world's largest contract chipmaker and the leading manufacturer of advanced AI chips, making it a "pure-play artificial intelligence stock". It plays a critical role in making advanced chips like GPUs, which are essential for AI technologies. In the third quarter of 2025, advanced nodes (7-nanometer and below) accounted for 74% of its wafer revenues, demonstrating its technological leadership.

Accelerated AI Demand: TSMC is experiencing accelerated demand for AI-optimized chips, with requests for foundry capacity from customers and their customers. The company anticipates AI accelerator demand to grow at a mid-40%s compound annual growth rate through 2029, potentially exceeding this forecast. This strong AI-driven demand has led to a significant increase in its AI-related chip foundry business revenue compound annual growth rate forecast from the "mid-40s" to the "mid-to-high 50s".

Capacity Expansion and Technological Advancement: TSMC is expanding its chip-on-wafer-on-substrate (CoWoS) packaging capacity, crucial for integrating logic and high-bandwidth memory on AI accelerators, with plans to reach 120,000 to 130,000 wafers per month by the end of 2026. The company also expects volume production of its N2P and A16 technologies to begin in 2026, which could trigger another multiyear upgrade cycle in data centers, smartphones, and AI accelerators.

Robust Financial Performance: In the fourth quarter, TSMC's revenue increased by 20.45% year-over-year, beating market forecasts, and net profit jumped 35% to a record T$505.7 billion ($16.01 billion). Its non-GAAP adjusted earnings per share were $3.14 on sales of $33.7 billion, surpassing analyst estimates. This strong performance reinforced the durability of AI-driven semiconductor demand. TSMC also raised its capital expenditure budget to $52 billion-$56 billion from $40.9 billion in 2025, signaling confidence in sustained AI chip demand.

Impact of AI Demand on TSMC's Market Valuation

AI demand is significantly influencing TSMC's market valuation, with analysts believing the market may still be underpricing its AI exposure despite recent gains.

Analyst Optimism and Price Targets: Several Wall Street analysts believe TSMC's rally may not be over, with some raising price targets. Susquehanna analyst Mehdi Hosseini increased TSMC's price target from $300 to $400, highlighting its critical role in AI compute. JPMorgan and Goldman Sachs also indicate that AI will be a multi-year growth driver and a catalyst for TSMC's stock.

Valuation Metrics: TSMC shares currently trade at approximately 25.7x forward earnings, with EPS projected to grow 33.4% annually over the next three to five years. Revenue growth is expected to climb 34.5% this year and an additional 23.6% next year. This valuation is considered reasonable relative to its growth profile and compelling within the broader AI ecosystem, especially given its unrivaled position as the premier advanced AI semiconductor foundry.

Market Sentiment and "AI Mega Trend": TSMC's strong earnings have increased optimism in the global AI boom, bolstering the idea that AI concept stocks still have enormous room for growth. The company is described as central to an "AI mega trend," which has helped it outperform rivals and forecast robust annual growth. The AI boom continues to be strong, as evidenced by TSMC's financial results.

Influence on Upstream Suppliers: TSMC's capital spending and strong performance also positively impact upstream equipment suppliers like ASML Holding (ASML), as increased spending translates into higher demand for their advanced lithography systems, further confirming the depth of the AI cycle.