In addition, DeepSeek also dampens sentiment around TSMC’s earlier guidance of a mid-40s five-year AI revenue CAGR.
In a Jan 28 note, Lee says he anticipates “elevated short-term volatility” to TSMC’s share price as cloud service and app developers leverage R1’s open-source nature to improve their own offerings.
“These efficiency gains may temporarily depress the demand for computation power. However, we believe TSMC will benefit from more durable AI spending in the long run, as more potent models improve the likelihood of profitable innovations, which incentivises reinvestment,” says Lee.
Another growth driver is cheaper models, which reduce barriers to entry and attract numerous smaller app developers, Lee adds.
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Hence, Lee is maintaining his NT$1,800 ($73.76) fair value estimate on TSMC, along with a US$273 target price for each TSMC ADR.
Lee has a five-star rating on Taiwan-listed TSMC against Morningstar’s five-tier scale. This top rating not only means “appreciation beyond a fair risk-adjusted return is highly likely over a multi-year time frame”, but the current market price “represents an excessively pessimistic outlook, limiting downside risk and maximising upside potential”.
Lee writes: “We see the stock as undervalued, and the share price pullback presents an entry opportunity for long-term investors.”
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Lee says his forecasts do not assume Chinese AI companies gain access to TSMC’s cutting-edge processes. “We believe demand from the US and other Western countries is enough to support TSMC's AI revenue growth for the next five years.”
TSMC is still supply-constrained, he adds. “We foresee minimal effect on TSMC’s profitability as its factories should remain fully utilised in case of a mild reduction in AI investments.”
In addition, Meta’s “surprisingly large” 2025 capital spending budget and the Stargate venture’s US$500 billion announcement support Lee’s view regarding strong AI investments in the long term.
Will DeepSeek be penalised by the US government?
There is low imminent risk for DeepSeek to be caught in the crossfire, says Lee. “DeepSeek has recently restricted new registrations to Chinese numbers so that will limit the number of US users. They have not released any commercial versions or monetisation plans so there’s no direct monetary impact even if new restrictions are rolled out.”
In addition, DeepSeek has also not accepted outside investors — all funding comes from the founder’s quant fund.
“Since DeepSeek is open-source, the most probable scenario is US tech corporations leveraging the public codes to refine their own models, resulting in lower AI cloud and computation costs globally,” says Lee.
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What does DeepSeek mean for Asia’s semiconductor stocks?
DeepSeek shows it is possible to use less powerful chips to create similarly powerful models, says Lee.
For Hong Kong-listed Semiconductor Manufacturing International (SMIC) and Hua Hong Semiconductor, it could mean less urgency to produce cutting-edge AI chips, and hence less enthusiastic government support in the form of subsidies, he adds.
“Specifically on SMIC, the stock has been strong year to date on government subsidies on domestic appliances — these don’t use cutting-edge chips [and] lower [their] 2025 capex budget, [thereby] improving cash flow and overall bullish sentiment on China’s self-sufficiency push.”
The DeepSeek news is the “perfect time” for some bulls to take profit, says Lee. “We believe there’s additional selling pressure in SMIC and Hua Hong as China and Taiwan markets are already closed for the Lunar New Year, forcing some investors to rebalance their portfolios by selling in Hong Kong. For reference, Taiwan will reopen on Feb 3.”
While Morningstar does not cover many Japanese equipment names, DeepSeek could be a “perfect excuse” for the US to launch even tighter controls over the supply chain for semiconductor equipment, says Lee.
“While there will be elevated short-term volatility as demand may fluctuate with efficiency gains and wider adoption, we’re bullish over the long-term as wider adoption should win out, and lead to sustainable AI investments,” he adds.
Shares in TSMC closed at NT$1,135 on Jan 22.
