Taiwan Semiconductor’s Huge U.S. Move—Stock Impact Ahead
Taiwan Semiconductor Manufacturing (NYSE: TSM) is making a massive investment in the United States. This move may be the biggest economic success for the Trump administration so far. The semiconductor company plans to invest another $100 billion in the country, home to many of its key customers like NVIDIA (NASDAQ: NVDA) and Apple (NASDAQ: AAPL).
Most economic analysis surrounding Trump’s tariff policies has been negative. This isn’t unwarranted, given that tariffs mean higher prices. TSMC's big investment shows that tariff threats can be useful, especially for strong economies like the United States.
TSMC expects the investment to create 40,000 new construction jobs and to add tens of thousands of high-paying tech jobs in the United States. However, for investors, the key question is how this investment impacts the future of the semiconductor leader.
TSMC: Significant U.S. Investment Could Cause Significant Margin Dilution
TSMC’s expanded investment includes “plans for three new fabrication plants, two advanced packaging facilities, and a major R&D team center." This adds to the one fab in Arizona that is currently operational and the two fabs that are being built. The exact timeline for building these facilities is unknown.
However, the company plans to create 40,000 construction jobs in the next four years. In the United States, building a semiconductor fab takes just over three years. This suggests that TSMC may begin the permitting and design process for these plants in the next year. This process takes 14 to 20 months once it begins. So, it is fair to argue that TSMC may begin construction of these plants within 26 to 32 months. Thus, TSMC will have to start thinking about how it will fund this large project soon.
The company generated over $26 billion in free cash flow over the last 12 months. It also ended 2024 with around $74 billion in cash and short-term investments. If it kept generating the same amount of free cash flow, it would have $178 billion in cash and short-term investments in four years. TSMC would need to invest around 56% of that to reach the $100 billion mark in four years. This is a lot of money and will likely put a significant amount of financial stress on TSMC.
In an interview with Taiwan Talks, Rocky Uriankhai of SciTech Power Research made remarks in this vein. He stated that the large investment would “mess up” TSMC’s long-term 53% gross margin and 40% net profit goals. Two months before this investment announcement, TSMC said it expects margin dilution from the ramp-up of its current overseas fabs of 2% to 3% over the next five years. This new investment could significantly increase this margin dilution. Still, TSMC hasn’t specifically said it will make all these investments in the next four years. This gives the company a chance to extend this potential dilution over a longer period.
TSMC’s Investment: A Key Move Toward Risk Mitigation
Despite the financial strain TSMC might feel from this investment, it is limiting other risks. The investment is largely seen as a move to avoid tariffs of between 25% and 100% on its products floated by President Trump.
More importantly, the company is also making concessions to solidify its relationship with the United States government. This is extremely important to the firm’s continued success. A threat has loomed for years that China may look to invade and take over Taiwan. This would have devastating effects on TSMC’s business and stock.
It seems likely that TSMC has significantly strengthened the protection it could receive from the United States against China. The Trump administration hasn’t provided security guarantees to Taiwan. However, the TSMC investment aligns interests. Most of TSMC’s operations remain in Taiwan. Those operations will need to continue going smoothly for the United States to reap the economic and security benefits of this investment.
TSMC’s Investment Could Bring Medium-Term Pain for Long-Term Gain
Overall, TSMC’s investment feels more like a necessary evil than anything else. It is likely to put a financial strain on the company in the mid-term. However, it helps them mitigate geopolitical and tariff risks. The financial impact of the investment may surprise markets in the coming quarters, which could put downward pressure on shares. However, the firm’s dominance in semiconductor manufacturing remains undeniable, and this move helps mitigate the existential risk from China. In the long term, this adds to TSMC’s outlook, but investors should exercise caution regarding this name.
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