Taiwan Semiconductor's stock price has soared, but the bulls are also worried: Has it risen too sharply?

Zhitong App learned that the rapid rise of Taiwan Semiconductor (TSM.US) makes it harder for people to ignore the risks faced by the world's largest contract chip manufacturer, even for its most ardent supporters. With global investors' fervor for artificial intelligence, TSMC's stock price has surged over 110% from its low point in October 2022, and its major customer NVIDIA (NVDA.US) has also seen an increase in stock price. Although revenue related to artificial intelligence accounted for only 6% of TSMC's total revenue last year, the figure has been rising significantly due to market expectations of a leap in demand.

For most of the past two months, the stock's relative strength index has been in the overbought zone, indicating that the rebound has been too large and too fast. The premium of the stock relative to the average target price set by analysts has also hit a historical high.

Philip Lee, an analyst at Morningstar, is one of the analysts in the industry who has given the highest target price. However, he admits to feeling somewhat nervous about how long the rapid growth of artificial intelligence can be sustained. His target price of NT$950 implies an increase of over 20%.

Lee said: "If I look at the order book, I would be a bit concerned about the sustainability of artificial intelligence demand over a three to five-year time span, because you can't spend billions of dollars on data centers every year."

In January of this year, TSMC stated that its revenue from artificial intelligence is growing at an annual rate of 50%, and by 2027, the company's revenue from artificial intelligence will reach around "13%". The company is constructing factories in the United States, Japan, and Germany to meet the demand for artificial intelligence chips used by global giants such as Amazon (AMZN.US) and Microsoft (MSFT.US) in their data centers.

Considering the trade tensions and the potential impact of this year's U.S. presidential election, geopolitical concerns have cast a shadow over the outlook. Lee mentioned that it is currently unclear whether TSMC's strong orders are mainly driven by end demand for artificial intelligence products or by U.S. customers increasing inventory to hedge policy uncertainties.

Kevin Wang, an analyst at Mizuho Securities Asia Limited, pointed out another risk, which is how quickly Apple (AAPL.US) can respond to the downturn in the smartphone industry and successfully add artificial intelligence features to its devices. Apple accounts for over 20% of sales for this Taiwanese contract manufacturer. Wang said: "For the iPhone, we do see actual weakening demand in China, so there may be some potential risks to their orders." However, despite these concerns, both Morningstar and Mizuho remain optimistic about TSMC's stock, with 35 "buy" ratings, only one "hold" rating, and no "sell" ratings. While the debate over overheating continues to accompany the long-term rebound of global artificial intelligence, analysts seem to agree that valuation is not an issue for TSMC. The stock is expected to have a P/E ratio of 16 times next year, roughly in line with the median estimate for the next five years, ranking near the bottom among major chip stocks globally.

Daniel Liang, portfolio manager at Cathay Securities Investment Trust in Taipei, said, "It is difficult to conclude that there is a bubble in artificial intelligence stocks. For any company where AI contributes more than 10% of revenue, a valuation of 30 times is not high in my opinion." One of the largest assets held by the fund is TSMC.