High-risk, low-risk investments

Can an investment be both low risk and very risky? This is entirely possible when a chip manufacturing giant like Taiwan Semiconductor Manufacturing (NYSE:TSM) controls so much of a niche market, and when there are geopolitical flashpoints that could explode at any time.

This is not a call to stockpile gold bars and canned goods for fear of international chaos. Rather, it is an invitation to consider how a seemingly risk-free asset like TSM stock can simultaneously be the most and least conservative investment.

Giants Rarely Mentioned

The most talked about artificial intelligence-compatible hardware manufacturer in the United States, and probably elsewhere, is NVIDIA (NASDAQ:NVDA). However, from a global perspective, there are companies as dominant as NVIDIA in certain niches.

Of course, I’m talking about Taiwan Semiconductor. American investors like to talk about NVIDIA, Advanced Micro Devices (NASDAQ:AMD), and sometimes Intel (NASDAQ:INTC). However, because the company is located far away in Taiwan, conversations do not often center around Taiwanese semiconductors.

What U.S.-based stock traders sometimes overlook is Taiwan Semiconductor’s incredible size and market share. The company’s share of the global manufacturing market for advanced semiconductors used in AI applications exceeds 90%, according to Pictet Asset Management (via Bloomberg).

Additionally, Taiwan Semiconductor’s current market capitalization is approximately $717 billion. AMD may be more beloved on Wall Street than Taiwan Semiconductor, but that dwarfs AMD’s market capitalization of about $310 billion.

This doesn’t mean that no one is talking about Taiwan Semiconductor, but it doesn’t seem to be on the radar of “fintwit” (financial social media) or the mainstream financial press. Therefore, it is worth considering whether there may be low-risk, high-probability investment opportunities with TSM stocks.

Taiwan Semiconductor’s GAAP-measured, trailing 12-month price-to-earnings (P/E) ratio of 22.6 is more favorable than its sector’s median P/E ratio of 29.55. Moreover, the company’s P/E ratio is clearly lower than NVIDIA (73.63), Intel (106.6), and AMD (a tearful 361.09).

This may sound like a no-brainer to risk-averse, value-conscious investors. Taiwan Semiconductor actually produces its own chips (not all so-called “chip manufacturers” produce these chips). Additionally, the company is consistently profitable and has an excellent track record of beating analysts’ quarterly EPS estimates.

In fact, analysts are almost unanimously bullish on TSM stock. For example, Yahoo! Finance, Bank of America analysts recently renewed their Buy rating on Taiwan Semiconductor stock, raising their price target from $760 to $880, citing increased demand for the advanced materials the company produces.

Big risks for low-risk chipmakers

Frankly, I could go on and on about the bullish arguments for investing in Taiwan Semiconductor. To sweeten the deal, the company offers an annual dividend yield of 1.49%. That might not sound like much, but it’s pretty good for a big tech company in the 2020s.

To further reduce the stock’s risk, Taiwan Semiconductor is reportedly considering building advanced chip packaging capabilities in Japan. Obviously, if there was no demand, the company wouldn’t be thinking about doing this.

Regarding demand, Taiwan Semiconductor also announced that it is “planning an additional advanced packaging production facility in Chiayi, southern Taiwan, to respond to strong market demand.”

But before you run out and buy TSM stock as a seemingly safe asset, keep in mind that the company faces a veritable powder keg of geopolitical risk. This is because China could step up its military operations or launch an acquisition mission in Taiwan at any time.

Just a few years ago, it would have been unthinkable that Russia would invade Ukraine, but it did happen. A nation does not necessarily have to signal its intention to attack another nation before it actually fires its first shot or begins putting its boots on the ground.

Of course, a military escalation on or near Taiwan would have broader implications than putting pressure on TSM stocks. Supply chains will be more restricted than they are today, and some countries will feel forced to respond with economic sanctions and/or other measures.

Still, an all-out war may not be necessary for Taiwanese semiconductor stocks to plummet. Tensions between countries can arise and manifest themselves in more subtle ways. Geopolitics are always complex, and so are international investments.

So perhaps TSM stock isn’t simply a no-brainer investment. In some ways it is clear, in others it is impenetrably complex. Perhaps the best course of action would be to own a few Taiwanese semiconductor stocks and hope for peace and prosperity.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.