TSM Forensic Analysis

PART 1: TRADING EXECUTION

1. Trading Setup & Entry Strategy

Trend Status: BULLISH_UPTREND (Consolidating) Strategy: TREND CONTINUATION / DIP BUYING

• •Primary Entry Zone ($292 - $298):
  • •Enter 40% at $298.50: Current 5-Day SMA. Momentum is holding; we don't want to miss a breakout.
  • •Add 60% at $292.50: This aligns perfectly with the 50-Day SMA ($292.43). This is the institutional support line. If it hits this, load the boat.
• •Stop Loss ($284.00):
  • •Reasoning: A break below $285 violates the recent swing low and puts the price comfortably inside the lower Bollinger Band ($279). If we lose $285, the intermediate trend is broken.
• •Upside Targets:
  • •Target 1: $310.50 (Upper Bollinger Band test).
  • •Target 2: $345.00 (Blue sky breakout / Fib extension).
• •Risk/Reward: ~1:3.5 at weighted average entry.
• •Timeframe: 2-6 Weeks (Swing).

2. Executive Summary

Thesis: TSM has successfully transitioned from a cyclical semiconductor play to a secular AI infrastructure monopoly. The 2024 financials confirm a structural shift: HPC (AI) now accounts for 51% of revenue, overtaking smartphones. With Gross Margins expanding to 56.1% despite the ramp of expensive 3nm nodes, TSM demonstrates immense pricing power. Technicals show a healthy consolidation above the 50-day moving average, digesting a 27% premium over the 200-day.

Conviction: HIGH (8.5/10). The fundamental moat is widening with N2 (2nm) on track for 2025, while competitors struggle to yield. The only dampener is the "Taiwan Geopolitical Discount," which is priced in.

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PART 2: DETAILED RESEARCH

3. Recent Material Events (8-K/News Analysis)

• •U.S. CHIPS Act Funding (Nov 2024): TSMC Arizona finalized agreements for up to $6.6B direct funding and $5B loans. This significantly de-risks the U.S. expansion, although operational costs in the U.S. remain a drag on blended margins.
• •Earthquake Impact (Jan 2025): Recent seismic activity caused ~NT$5.3B in losses (net of insurance). While financially immaterial against NT$1.16T net income, it highlights the geographic concentration risk.
• •Export Controls (Jan 2025): New U.S. rules reinforce licensing for <16nm chips. TSM has successfully navigated this via VEU authorization for Nanjing, but the compliance burden is increasing.

4. Insider Trading Activity

• •Pattern: NEUTRAL to MILD ACCUMULATION.
• •Executive compensation is heavily stock-based (RSAs). There has been no significant panic selling by insiders despite the stock hitting ATHs in late 2025. Management retention is high, signaling confidence in the N2 ramp.

5. Current News & Market Context

• •Sector: The "AI Supercycle" remains intact. Hyperscalers (Amazon, Google, Microsoft) have signaled continued capex expansion for 2026, directly benefiting TSM's advanced nodes.
• •Yields: Reports indicate TSM's 3nm yields are significantly outperforming competitors (Samsung/Intel), granting TSM effectively 90%+ market share in the premium tier.

6. Business Model Analysis

• •Revenue Mix Shift: HPC is now 51% of revenue (up from 43% in 2023). Smartphone is down to 35%. TSM is no longer an iPhone proxy; it is an NVIDIA/Data Center proxy.
• •Pricing Power: Gross Margin expansion to 56.1% proves TSM can pass on inflationary costs (electricity hikes in Taiwan) and high depreciation costs to customers.

7. Financial Health (Forensic View)

• •Cash Flow: Operating Cash Flow (OCF) was NT$1.82T ($55.7B) vs Capex of NT$956B ($29.7B).
  • •Insight: TSM is funding its massive expansion entirely from internal cash flow, with massive free cash flow left over.
• •Balance Sheet: Cash position swelled to NT$2.42T ($74B). Net cash position is fortress-like.
• •Red Flags: None. Inventory levels are healthy; receivables are tracking with revenue.

8. Valuation Analysis

• •Reverse DCF: At $302.84, the market implies a ~15-18% growth rate for the next 5 years. Given the projected N2 ramp and AI demand, this is reasonable, perhaps slightly undervalued if AI demand accelerates.
• •Multiples: Trading at ~35-40x trailing earnings (ADS basis). High relative to history, but justified by the transition from cyclical to secular growth.

9. Competitive Position

• •Moat: WIDENING. TSM has 34% of the "Foundry 2.0" market (logic + packaging). In advanced nodes (7nm and below), they hold 69% of their own wafer revenue mix.
• •Competitors: Intel Foundry Services remains a "show me" story; Samsung struggles with yields. TSM stands alone at the bleeding edge.

10. Management Quality

• •Assessment: EXCEPTIONAL. New Chairman/CEO Dr. C.C. Wei has navigated geopolitical minefields while maintaining technological supremacy. The smooth transition of power in mid-2024 and the execution of the N3 ramp demonstrate operational excellence.

11. Risk Factors

• •⚠️ Geopolitics (HIGH): 68-70% of revenue comes from North America, but manufacturing is centered in Taiwan. Any blockade or escalation is catastrophic.
• •⚠️ Customer Concentration: Top customer (Apple/NVIDIA) accounts for 22% of revenue. Dependency on a few key AI players is high.
• •⚠️ Energy Costs: Taiwan electricity tariffs hiked 25% (Apr 2024) + 14% (Oct 2024). This creates a permanent drag on Taiwan-based margins.

12. Forensic Accounting Flags

• •✅ Revenue Quality: Receivables growing in line with sales.
• •✅ Depreciation: Heavy depreciation reflects reality of capital intensity; no aggressive capitalization of expenses detected.
• •⚠️ Earthquake Losses: NT$5.3B loss in Q1 2025. Monitor if this becomes a recurring excuse for margin misses.

13. Technical Analysis & Trade Timing

• •RSI (56.72): Perfect setup. Not overbought (>70), allowing room for a breakout, but not oversold (<30) which would indicate broken momentum.
• •Moving Averages:
  • •Price ($302) > SMA50 ($292) > SMA200 ($236).
  • •The gap between SMA50 and SMA200 suggests a mature, strong uptrend.
• •Bollinger Bands: Narrowing ($279-$310). A volatility squeeze is forming. We want to be positioned before the expansion to the upside.

14. Short-Term Trading Strategy (2-5 Days)

• •Timeframe: SWING_1_2_WEEKS
• •Position Sizing: 4% of Portfolio (High Conviction).
• •Plan:
  1. •Bid $298.50 (20% size) to catch immediate continuation.
  2. •Bid $292.50 (80% size) on the 50-Day SMA touch.
  3. •Hard Stop: $284.00.
  4. •Profit Taking: Sell 50% at $315, Trailing stop on the rest.

15. Investment Recommendation

RATING: BUY

Justification: The "Widowmaker" rule does not apply because fundamentals and technicals are aligned (Growth + Uptrend). The "Value Trap" rule does not apply because the company is expanding margins and market share. TSM is the "arms dealer" for the AI war. We are buying the pullback to the institutional average (50-Day SMA).

One-Liner Thesis: TSM has effectively monopolized the AI supply chain, and with N2 volume production imminent in 2025, the stock is digesting its recent run before the next leg higher.