Quake-Proof Rally: Taiwan Semiconductor Stock Shrugs Off Risks, But Caution Is Warranted

Can a Taiwan-based company earn grant funding from the U.S. government? Apparently, it’s possible and Taiwan Semiconductor (NYSE:TSM) is reportedly set to receive a sizable capital payout. Prudent investors should exercise caution before investing in Taiwan Semiconductor stock.

The bullish argument for Taiwan Semiconductor is quite strong. Still, the market is highly efficient and is fully aware of the artificial intelligence hardware market’s growth potential. It’s fine to keep Taiwan Semiconductor on your watch list, but let the share price pull back before making your move as an investor.

Taiwan Semiconductor Stock Rallies Despite Natural Disaster

A year ago, Taiwan Semiconductor stock chopped around in the $80s; nowadays, it’s in the $140s. That’s a substantial share-price rally, but it’s understandable since there’s strong global demand for AI-enabled processors.

Furthermore, Taiwan Semiconductor is reportedly considering enhancing its chip-packaging capacity in Japan. This is a clear indication that Taiwan Semiconductor is prepared to expand its global presence.

That global presence, by the way, is already enormous. Per Bloomberg, Pictet Asset Management estimated that Taiwan Semiconductor “has more than a 90% share in manufacturing advanced semiconductors used for AI.”

Taiwan Semiconductor’s revenue increased 9.4% in just the first two months of 2024. That’s astonishing, when you really think about it.

On top of all that, Taiwan Semiconductor is expected to receive over $5 billion worth of federal U.S. grants, under the condition that Taiwan Semiconductor will establish a chipmaking factory in Arizona. That’s huge news, and it’s another pillar of the bull case for TSM stock in 2024.

Of course, there’s another news item that’s on people’s minds now. Specifically, Taiwan’s most powerful earthquake in 25 years happened recently. It’s a tragic event that could disrupt supply chains for a while.

Yet, Taiwan Semiconductor stock actually went up on the day after this earthquake occurred. It just goes to show that investors are massively bullish about Taiwan Semiconductor and believe that the company is resilient enough to withstand practically any setback.

Taiwan Semiconductor and the Efficient Market

In light of these points, it sounds like investors should drop everything and load up Taiwan Semiconductor stock. However, this evidently already happened. Again, just look at the stock’s price appreciation from the past 12 months.

The market is ultra-efficient and, without a doubt, has already priced everything I’ve mentioned into TSM stock. Now, Taiwan Semiconductor has the challenging task of living up to the market’s high expectations.

Sure, there’s risk involved because of the ongoing geopolitical tension between China and Taiwan. Even beyond that, though, prudent investors should wonder whether the AI-hardware market will grow as rapidly as many people assume it will. Morningstar analyst Phelix Lee succinctly summed up the argument for caution:

“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.”

Indeed, that’s the trillion-dollar question: Is this magnitude of AI-hardware market growth sustainable? If not, then Taiwan Semiconductor stock is susceptible to a deep drawdown in the coming quarters.

Taiwan Semiconductor Stock: Great Company, Not-so-Great Price

Without a doubt, investors should expect Taiwan Semiconductor to grow along with the global AI-infrastructure industry. The problem is, the market already knows this.

Investors even shook off the devastating earthquake in Taiwan and pushed TSM stock higher after that event. In light of this, my concern is that the company’s anticipated growth has already been factored into the Taiwan Semiconductor share price.

It’s fine to feel bullish about Taiwan Semiconductor, but I encourage you to be patient and wait for a more favorable price point.

Personally, I would like to see Taiwan Semiconductor stock pull back to its early-February price of $115. Then, it will be time to grab a few shares for a confident long-term position.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.