22 Aug Stock Report – TAIWAN SEMICONDUCTOR MFG
TAIWAN SEMICONDUCTOR MFG (NYSE: TSM)
Market Cap: 209.56
P/E Ratio: 21.51
Dividend: $1.28 per share (~3% at current price)
Taiwan Semiconductor is the first and largest ‘pure-play’ semiconductor manufacturer in the world. Servicing over 400 companies, including many of the largest names on Wall Street such as Apple, Qualcomm, Nvidia, Advanced Micro Devices (AMD), MediaTek, Xilinx and even Intel (which has its own fabrication facility).
The undisputed market leader in microchip and integrated device manufacturing TSM is unmatched in both quality and quantity of production. TSM is regularly the only option for companies that require large-scale production of cutting-edge semiconductors (Apple for instance). This monopolisation allows TSM to undercut other manufacturers on outdated models as well, further cementing their hold of market share.
Barriers to entry
The capital outlay required to build the factories and innovate production techniques for new semiconductor models is immense. This cost of entry is an incredibly high barrier for potential new entrants (and even existing competitors) into the sector. TSM themselves estimate that the cost of fabrication for the new 3 nanometre conductors alone will be between 15 – 20 billion USD. Fortunately, TSM has spent the past decade investing heavily in capital expenditure to flesh out production capability and generated over 30 billion USD of revenue in 2018. Whereas competitor United Microelectrics Corp (UMC), for instance, only generated 5 billion USD in 2018, meaning it will be almost impossible for them to match TSM’s quality and quantity of production. TSM’s size, first-mover advantage and strong existing relationship with its customers make its position as industry leader virtually impossible to dethrone.
The bulk of TSM’s revenue over the past 5 years has come from its exclusive rights to the production of 100% Apple Inc.’s mobile processor. While Apple is still TSM’s most important customer, the slow down in demand for smart phones sales globally have prompted TSM to look for other areas for growth. Scoring contracts from titans in computing and 5G, such as AMD and Qualcomm, has granted TSM income diversification and exposure to key future growth drivers. 5G, Artificial Intelligence and Internet of Things are all booming areas in the technology space and are expected to be billion (perhaps even trillion) dollar industries in the years to come, TSM’s position as industry leader and innate ability to win and retain business should see them benefit from the ever-growing demand for processing power as these sectors grow.
Share price consolidation over the past 18 months has created a great buying opportunity for TSM shares at or below 37 USD per share, allowing for big upside potential as key growth drivers such as 5G, AI and Internet of Things enter their boom phases as TSM diversifies and expands its revenue sources.
Taiwan Semiconductor is the global leader in the semiconductor manufacturing industry. Monopolisation of quality and quantity of production, strong barriers to entry for competition, exposure to booming sectors and recent share price consolidation make TSM a conviction buy at $37 and below.