TSMC $TSM Faces 50% EPS Cut Risk; Geopolitical Fallout Looms Large

The spectre of geopolitical disruption looms large over Taiwan Semiconductor Manufacturing Company (TSMC), the world’s leading chipmaker. A potential conflict or invasion scenario in Taiwan could severely impact the company’s earnings per share (EPS), given its concentrated production base on the island. While TSMC has made strides to diversify its manufacturing footprint, particularly in the United States, the financial implications of such a disruption warrant a rigorous examination. This analysis delves into the potential EPS impact under adverse conditions, factoring in current capacity distribution and mitigation strategies.

Geopolitical Risk and Earnings Vulnerability

TSMC’s dominance in advanced semiconductor manufacturing—producing over 50% of the world’s chips—makes it a critical node in global supply chains. However, with the majority of its cutting-edge facilities located in Taiwan, any significant disruption could trigger a sharp decline in output. Industry estimates suggest that over 90% of TSMC’s capacity for nodes at 7nm and below resides in Taiwan, with less than 5% of advanced node (below 7nm) capacity expected to be online outside Taiwan by the end of 2025. This includes the initial Arizona fab production of 4nm chips, which remains a small part of TSMC’s total advanced node output. The company aims for mass production of 2nm chips in Taiwan in late 2025, with US and Japanese capacity for advanced nodes remaining limited for the foreseeable future. This concentration poses a substantial risk to revenue and profitability in a worst-case scenario.

Should a disruption occur, forecasts from industry analysts and recent research suggest a potential 80–90% reduction in EPS due to halted production and supply chain chaos. This would align more closely with the share of production at risk in Taiwan, particularly for the most profitable chip segments. However, mitigating factors such as elevated pricing power for scarce chips and potential government support for rebuilding could temper the blow, perhaps reducing the EPS impact to around 70%. With TSMC’s Q2 2025 (Apr–Jun) diluted EPS reported at NT$15.36, a 70% cut would imply a fall to approximately NT$4.61 under severe stress, which is a considerably harsher outlook for investors than previously considered.

Capacity Diversification: A Partial Shield

TSMC’s ongoing efforts to expand capacity outside Taiwan offer some buffer. The company has committed investments in the US, with its Arizona facilities just beginning to contribute meaningfully in 2025. According to multiple recent reports, the initial US fabs are producing small quantities of 4nm chips as of Q2 2025, with major advanced capacity—2nm or beyond—unlikely before 2028. Non-Taiwan facilities currently account for only 5–7% of total revenue in Q2 2025, and less than 10% of total production capacity. Europe (Germany) and Japan fabs focus on mature nodes (22nm, 28nm) and contribute a negligible share of advanced process revenue. Accordingly, diversification remains insufficient to provide any real safeguard to global chip supplies or TSMC’s profit stream in the event of a major disruption.

The updated table below reflects the most recent validated data for 2025:

These figures demonstrate that while diversification is underway, it is not yet sufficient to offset a major disruption in Taiwan. Investors must weigh this imbalance when assessing risk-adjusted returns.

Financial Resilience and Market Dynamics

TSMC’s financial performance in Q2 2025 (Apr–Jun) provides a context for its resilience. The company reported consolidated revenue of NT$933.79 billion and net income of NT$398.27 billion, reflecting a year-on-year profit increase of nearly 61%, driven by insatiable demand for AI-related chips. This robust demand could partially mitigate earnings losses in a crisis, as scarcity might allow TSMC to command premium pricing for chips produced at unaffected facilities. Furthermore, government subsidies—particularly from the US under initiatives like the CHIPS Act—could provide a financial cushion for rebuilding or accelerating overseas expansion.

However, mitigation comes with caveats. Rebuilding capacity or ramping up production elsewhere is neither swift nor cheap. Recent data confirms that TSMC’s new fabs typically require two to three years to reach meaningful output, and cost significantly more per wafer in overseas markets than in Taiwan. During the 2021–2022 chip shortage, order lead times often extended beyond six months even without direct supply shocks. Sudden loss of Taiwanese capacity in 2025 would almost certainly stretch those lead times into years, resulting in multi-quarter, possibly multi-year, EPS impairment.

Valuation Implications

At a forward price-to-earnings ratio of roughly 24x based on next-twelve-month estimates, TSMC’s valuation assumes uninterrupted growth and operational stability. A 70% EPS cut, as modelled under updated disruption scenarios, would inflate this multiple to roughly 80x on the reduced earnings—a stratospheric figure for any technology manufacturer. While the market retains a penchant for rewarding perceived technological winners, as seen in TSMC’s 30% equity rally in 2025, long-term investors should factor the true tail risk of major geopolitical disturbance. Sentiment on platforms such as X and among professional asset managers notes increasing awareness of these “invasion-adjusted” risk models as part of mainstream semiconductor investment analysis.

Conclusion

TSMC remains a cornerstone of the global semiconductor industry, but its exposure to geopolitical risk in Taiwan cannot be ignored. Under an adverse scenario, the company could see a 70%+ EPS decline in the near term, even factoring for mitigating elements like pricing leverage and government support. Diversification into the US and Japan, whilst accelerating, is still far too embryonic to offer meaningful protection. For investors, the conclusion remains: weigh TSMC’s unmatched growth—fuelled by AI and advanced manufacturing—against the material, unhedgeable risks that still define the company’s future. The data no longer merely suggest caution—they insist upon it.

References

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