Hello everyone,
I hope everyone spent some time catching up with friends and families in small groups with the phase 2 reopening. As the stock market is still relatively uncertain about the direction it wants to go, I rather adopt the mentality of looking at companies that I do not minding holding for a long term, probably 5-10 years. I have decided to look at Taiwan Semiconductor Manufacturing Company Limited (TSMC) (NYSE: TSM) (TWSE: 2330), and will share 3 main fundamental points that I think will propel this company forward.
Background: Established in 1987 and headquartered in Hsinchu Science Park, Taiwan, TSMC pioneered the pure-play foundry business model by focusing solely on manufacturing customers' products. By choosing not to design, manufacture or market any semiconductor products under its own name, the Company ensures that it never competes directly with its customers.
Notable clients: Apple, AMD, Nvidia, Qualcomm, Sony, (Huawei)
Leading Edge Technology
TSMC has set plans for a very sound logic node progression. As of now, TSMC have started the production for 5nm chips and plans are in place to ramp up the production capacity. In terms of the chips advancements, TSMC has also started to assemble a R&D specially for the development of the 3nm chips. I like this move a lot as it shows that the management has lots of hindsight and do not forgo the future development just because the current clients do not demand it. In terms of its competitors wise, the main competitor would be Samsung who also has acquired the expertise for 5nm production. The rest of its competitors are rather back dated due to the fact that the capital expenditure for developing the chips are extremely high, going into billions of dollars. Another competitor, Global Foundries abandoned its 7nm efforts due to the sheer complexity and costs involved. I see a first mover advantage here for TSMC.
Dominant Market Position
TSMC runs on a pure-play foundry business model, which means that they do not have any semiconductor products under its name. Because of this, clients are more willing to engage TSMC. For instance, it is unlikely for Apple to approach Samsung to manufacture its chips as they are direct competitors in the smartphones industry. Hence, there is really no clear or direct competitors that TSMC needs to be wary of as of now. Barriers to entry is also high given the high CAPEX.
Seen below, TSMC has been in a dominant position in the industry, with more than half of the market share.
Market share in 2019 (%)
It might be worthy to note that one of TSMC's key clients was Huawei in 2019. However, with the ongoing trade war between China and USA, TSMC have since stopped taking orders from Huawei. Huawei made up about 10-15% of TSMC's revenue in FY2019.
Yet, I do not have much worries about this. Recent news have seen Apple's desire to cut orders from Intel for its Mac chips and to start designing its own chips. Reports have stated that the chips will be manufactured by TSMC, and are said to be more advanced than the current chips provided by Intel. You can refer to this link for more information.
The only worry I then have is that TSMC might be overly reliant on Apple and its performance. But I do see a very high potential for it to tap on Apple's growth.
Speaking of Intel, the shortage of CPUs supplies by Intel have given AMD a chance to acquire market share in the industry. I see the partnership between AMD and TSMC to significantly benefit the latter as AMD continues to ramp up its production to meet the demand that Intel failed to meet.
Incoming Gaming Cycle
With the ongoing pandemic, stay home entertainment such as gaming has been on the rise. Nvidia, one of TSMC's clients will launch their 7nm GPUs this year. They have also locked down TSMC's capacity for 5nm production in 2021.
Furthermore, the highly raved and anticipated launch of PS5 has also been confirmed by Sony. PS5 will be utilising the 7nm chips from TSMC. It has been 7 years since the PS4 was launched and I believe that demand for PS5 will be extremely high at the launch.
Perhaps only drawback here is the rise of mobile phone gaming, which will result in lower than expected demand in this aspect.
On a final note, TSMC's production line has not been as badly affected by the pandemic as its closest competitor, Samsung. The former's manufacturing plants in Taiwan did not face any stringent regulations while Samsung's plants in South Korea met with lock down orders. There are also news of an incoming second wave of infection that might further hinder Samsung's plans to resume production. We might see some clients shift here should Samsung failed to meet the orders.
I might do a financial highlights review of TSMC, but for now, I continue to keep it in my watchlist. I have no holdings in TSMC as of now.
Stay safe and healthy,
P
