Taiwan Semiconductor Manufacturing Company Limited TSM, which is also known as TSMC, has taken a sharp hit, sliding 26% year to date. This drop significantly underperforms the broader Zacks Computer and Technology sector, which fell 20.8% during the same period.

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This steep decline raises the question: Should investors cut their losses and exit, or is it worth holding onto? While the near-term headwinds are real, the long-term growth story for Taiwan Semiconductor remains intact, making a strong case for holding the stock.

Why Did Taiwan Semiconductor Struggle?

TSMC’s recent decline stems from a mix of broader market weakness and company-specific concerns. A widespread sell-off in tech stocks, triggered by fears of escalating trade tensions and slowing economic growth, has put pressure on the entire sector. Companies that have benefited most from the AI boom, like Taiwan Semiconductor, are now experiencing valuation corrections.

On the company-specific front, higher energy prices in Taiwan, following a 25% electricity hike in 2024, pose a considerable challenge, especially as advanced nodes demand greater power. Softness in key markets like PCs and smartphones also dampens near-term prospects. These traditionally strong revenue drivers are projected to see only low single-digit growth in 2025, limiting Taiwan Semiconductor’s growth despite rising AI demand.

Additionally, rising operational costs, especially from its overseas expansion into Arizona, Japan and Germany, are other concerns. These new facilities, while strategically important for diversification, are expected to dilute gross margins by 2-3% annually over the next three to five years due to higher labor and utility costs coupled with lower initial utilization rates.

Geopolitical tensions, particularly between the United States and China, further cloud the outlook. With significant revenue exposure to China, export restrictions and supply-chain disruptions could pressure Taiwan Semiconductor’s operations.

Despite these challenges, TSMC’s dominant market position, robust financials and promising long-term outlook make it a stock worth holding onto.

AI Boom to Drive Multi-Year Growth for TSMC

The ongoing artificial intelligence (AI) boom has placed Taiwan Semiconductor at the center of a multi-year structural growth cycle. The company has established itself as the preferred manufacturing partner for AI accelerators, including graphics processing units (GPUs) and custom silicon developed by major players like NVIDIA Corporation NVDA, Advanced Micro Devices, Inc. AMD and Broadcom Inc. AVGO.

In 2024, AI-related revenues tripled, making up a mid-teen percentage of Taiwan Semiconductor’s total revenues, and the momentum is far from over. The company expects AI-related sales to double again in 2025, with an impressive 40% compound annual growth rate over the next five years. This positions TSM as the undisputed backbone of AI-driven technological advancements.

More importantly, the transition to 3nm and 2nm process nodes will be crucial in maintaining its leadership. These advanced nodes ensure higher efficiency and performance, reinforcing Taiwan Semiconductor’s position as the go-to foundry for cutting-edge semiconductor manufacturing.

Taiwan Semiconductor is not only growing but also scaling at an unprecedented pace to capitalize on the AI-driven growing demand for advanced chips. The company is set to invest between $38 billion and $42 billion in capital expenditures in 2025, far outpacing its $29.8 billion investment in 2024. The bulk of this spending — around 70% — is focused on advanced manufacturing processes, ensuring TSM stays ahead of the curve.

TSMC is also trying to expand its ties with U.S. chip designers — NVIDIA, Advanced Micro Devices and Broadcom. Citing people familiar with the matter, Reuters reported in March 2025 that Taiwan Semiconductor has explored potential partnerships with Nvidia, Advanced Micro Devices and Broadcom, including a joint venture to operate Intel's foundry division, potentially with minority stakes for the U.S. chip designers. If the deal materializes, TSM will be able to enhance its manufacturing capacity with less investment.

TSMC’s Resilient Financial Performance

Taiwan Semiconductor’s latest earnings report highlights just how dominant the company remains. In the fourth quarter of 2024, revenues surged 37% year over year to $26.88 billion, beating estimates by $504 million. EPS came in at $2.24, surpassing expectations, while gross margins improved to 59%, reflecting better cost efficiencies.

Taiwan Semiconductor Manufacturing Company Ltd. Price, Consensus and EPS Surprise

Taiwan Semiconductor Manufacturing Company Ltd. price-consensus-eps-surprise-chart | Taiwan Semiconductor Manufacturing Company Ltd. Quote

The company’s 3nm and 5nm process nodes accounted for 60% of total wafer revenues, reinforcing its leadership in advanced semiconductor manufacturing. High-performance computing, a major growth driver fueled by AI adoption, contributed 53% to the overall revenues.

Taiwan Semiconductor expects its first-quarter 2025 revenues to range between $25 billion and $25.8 billion, implying a strong 34.7% growth rate at the midpoint. The company’s ability to maintain robust margins (57%-59% guidance) despite industry-wide cost pressures further underscores its financial resilience.

Taiwan Semiconductor also has a strong track record of outperforming expectations. The company has beaten the Zacks Consensus Estimate for earnings in each of the past four quarters, with an average surprise of 7.6%. For 2025, EPS is projected to grow by 30% to $9.15, signaling strong earnings momentum.

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TSM Stock Trades at Attractive Valuation

Taiwan Semiconductor trades at a forward 12-month price-to-earnings (P/E) ratio of 15.14, below the sector average of 20.58. This reasonable valuation, coupled with the company’s growth potential, offers an appealing entry point for investors seeking exposure to the semiconductor sector.

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Conclusion: Hold TSM Stock for Now

Taiwan Semiconductor’s technological leadership and strategic investments make it a compelling long-term player in the semiconductor space. However, short-term challenges, including rising costs, tariff wars and geopolitical risks, warrant caution. For now, holding TSMC stock remains the most prudent strategy, allowing investors to benefit from its industry leadership while navigating near-term uncertainties.

Currently, TSM carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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