Connecting the dots in the stock market tends to be one of the most challenging tasks for investors, especially in today’s market, where every piece of information and interrelation seems to be the be-all and end-all of potential risks and opportunities. Successfully making the connection between the development in one company relative to other peers or the broader sector can bring investors some additional green days in their portfolios.

Today’s connection comes through the technology sector, as one of the most followed companies in the semiconductor and chipmaking industry just reported its quarterly earnings. However, this analysis won’t be focused on that stock but rather on how it affects (in a good way) the future valuation potential of Taiwan Semiconductor Manufacturing (NYSE: TSM) since the connections are not always so clear to most in the market.

After seeing a double beat (revenues and earnings) for NVIDIA Co. (NASDAQ: NVDA) in May 2025, investors may feel a bit more at ease when it comes to investing in the semiconductor industry despite the recent uncertainty and volatility caused by the trade tariffs rolled out by President Trump recently, these and other reasons will become clear in just a bit for investors across the board.

NVIDIA’s Success Is Taiwan Semiconductor’s, Too

Most investors have recently focused on where NVIDIA stock will be headed after its earnings results, failing to realize that the company is a part of the bigger semiconductor machine and landscape. Zooming out a bit, investors can gain a broader perspective on how the industry is actually structured.

Before NVIDIA can sell its industry-leading chips to a company like Apple or another consumer electronics giant, it needs to obtain the raw materials and equipment necessary to manufacture them, and that is where a company like Taiwan Semiconductor comes into play.

To put it more accurately, it is not a company “like” Taiwan Semiconductor, but rather that specific name. Because Taiwan Semiconductor owns a significant portion of the global semiconductor supply chain, it is one of the first companies to receive payment for any hint of new demand for semiconductors from companies like NVIDIA.

Knowing how this dynamic works, NVIDIA’s quarterly earnings results, which drove the stock higher by roughly 4% in reaction, allow investors to look to Taiwan Semiconductor as a potential buy opportunity before the trickle-down effects are priced into the stock.

Is Anyone Noticing Taiwan Semiconductor Right Now?

Just as subtle as the benefits of Taiwan Semiconductor’s market positioning are, so are the ways that some institutional investors have decided to invest in the stock for upside exposure. An example can be taken from Silicon Valley Capital Partners, which, as of late May 2025, decided to open a new position in the chipmaking behemoth.

With a new stake worth up to $242,000, the investment group has aligned its portfolio with the belief that Taiwan Semiconductor could begin to move toward higher prices in the coming months and quarters. While this may not be the most sizeable position, such as the $1.5 billion held by AllianceBernstein, it still shows investors that new willing buyers are coming in today.

On the flip side, investors can notice that Taiwan Semiconductor's stock short interest has declined by as much as 5.8% over the past month, showing signs of potential bearish capitulation, as today’s price has very little downside left to absorb.

Not only is today’s valuation more favorable for buyers, but a rally of up to 20% during the same month might have stirred up new fears in those who decided to go short on this stock. Capital flows on both the long and short sides would suggest to investors that Taiwan Semiconductor’s view is nothing but bullish today.

Any More Upside Left for TSM?

Upside potential can be measured in two ways besides Wall Street analysts' projections regarding future stock value. While today’s analyst ratings may be set on the safer side, Taiwan Semiconductor's stock valuations and future earnings growth can be a more accurate gauge of the upside.

Wall Street analysts expect the company to report earnings per share (EPS) of up to $2.65 by the fourth quarter of 2025, a significant increase from the current reported EPS of $2.12. Considering that stock prices tend to follow the underlying EPS growth rates, it would make sense for investors to see this reflected in the company’s valuation metrics.

By trading at a price-to-book (P/B) ratio of up to 9.1x today, Taiwan Semiconductor commands a premium over the rest of the computer sector’s average valuation of 6.8x. While some investors may see this as expensive, they should keep in mind that the company’s superior EPS growth and market share should stand to justify this current premium and upside.

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