Discount cash flow valuation of Taiwan semiconductor manufacturing company limited

Abstract

This thematic paper aims to value the stock price of Taiwan Semiconductor Manufacturing Company Limited (TSMC), listed on the Taiwan stock market with the ticker 2330, based on the discounted cash flow valuation model using the free cash flow to firm (FCFF) method. This model captures the fundamental value of the firm and considers future performance and free cash flow, providing a forward-looking perspective in the valuation. TSMC operates in the semiconductor foundry business, a sunrise industry due to rapid expansion in the information and technology sector. Semiconductors are essential hardware for the majority of tech products. Additionally, the growing markets for artificial intelligence, mobile phones, computers, and data centers create substantial demand for semiconductors, from which TSMC is poised to benefit for years to come. The target price for TSMC at the end of 2024 is estimated to be approximately 1,252 Taiwan dollars per share, which is 20% higher than the current share price of 1,035 Taiwan dollars per share as of July 9, 2024. Hence, the valuation indicates a BUY recommendation. In conclusion, the valuation suggests that TSMC has a high intrinsic value, but the method requires numerous assumptions. Therefore, the value must be considered carefully, and investors need to account for market volatility.