The Dominance of TSMC in the Semiconductor Market
Taiwan Semiconductor Manufacturing Company (NYSE:TSM), also known as TSMC, is currently the linchpin of the global economy. The significance of semiconductors in today’s electronic devices cannot be overstated, ranging from smartphones to automobiles and even household appliances like refrigerators. The recent chip shortage has impacted 169 different industries, leading to governments, including the USA, introducing the Chips Act and making substantial investments in this sector. TSMC, with its unparalleled array of advanced nodes, stands as the undisputed leader in this vital domain. Despite facing historical challenges to Taiwanese independence, TSMC is currently trading at an attractive valuation.
TSMC’s Competitive Edge in the Semiconductor Space
When it comes to competition, Samsung (OTCPK:SSNLF) emerges as the primary contender to TSMC. However, TSMC maintains a significant lead in advanced chips, with Samsung primarily engaging in price competition with less advanced chips. Moreover, TSMC’s market share in the advanced foundry market stands at an impressive 66%, owing to the reliability and high quality of its semiconductors. Notably, TSMC has faced challenges with its 3nm chips, allowing Apple (AAPL) to negotiate prices for its iPhone 15 Pro model, although TSMC has been selected to produce chips for the upcoming iPhone 16. While Samsung remains an alternative to TSMC for 4nm and 5nm chips, it would need to lead in 2nm or 1.4nm chips to pose a legitimate threat – a feat that seems insurmountable given TSMC’s vast knowledge advantage and superior capacity.
On the other hand, Intel holds promise, especially considering the imperative for a competitive semiconductor manufacturer in the U.S. and Europe. However, TSMC’s extensive experience and expertise, underscored by reports of Intel outsourcing some of its products to TSMC, firm up TSMC’s formidable competitive advantage.
The far-reaching impact of TSMC’s advanced chips across various sectors, from smartphones and laptops to automotive and artificial intelligence, underscores the crucial role played by the company. A testament to its significance is the fact that several companies, including Broadcom (AVGO), NVIDIA (NVDA) and AMD (AMD), heavily rely on TSMC’s products. Without TSMC, the global economy would face dire consequences, with the automotive industry’s struggles during the chip shortage serving as a striking example. Even governments are cognizant of TSMC’s pivotal role, as they acknowledge the company’s unparalleled pricing power and the formidable barriers to entry in producing chips at or near TSMC’s standard.
The dependence on TSMC’s products is only poised to expand in the future, reflecting the early stages of this transformative cycle.
TSMC’s Financial Strength and Performance
Amid discussions about TSMC’s robust gross margin, its net income margin of over 40% stands out as particularly impressive. Despite being situated in a capital-intensive industry, TSMC’s ample room for high profitability is evident, bolstered by its substantial competitive advantage due to the significant wage differential between the Western world and Taiwan. TSMC’s commendable balance sheet, featuring $48 billion in cash and a modest $29 billion in long-term debt, exudes financial robustness. The forthcoming Q4 results are anticipated to reaffirm the company’s strong financial position, with its net income surpassing long-term debt as of December 2022.
TSMC’s Capital Allocation and ROIC
TSMC’s robust ROIC underlines the company’s formidable competitive advantages, enabling it to generate well above-average returns on capital. With a low cost of debt at 1.5% and a cost of equity of approximately 11%, TSMC enjoys an impressive ROIC-WACC spread of 12%. The company’s substantial investments in R&D, constituting around 8% of sales, yield promising outcomes, as evidenced by the owner earnings, comprising a dividend yield of 1.80% and a 5-year EPS growth rate of 20.51%, culminating in owner earnings of 22.31%. TSMC also stands as a compelling dividend growth stock, with a dividend growth rate of 12.61% per year since 2012.