The world's largest chipmaker TSMC has appreciated its shares by more than 20% in the last month

Published by: 01.09.2021 14:47:51

Taiwan Semiconductor Manufacturing Company (NYSE: TSM) is one of the world's most talked-about chipmakers. The global chip shortage has solidified the contract chip maker's position as the semiconductor market leader. Let's see why everyone is talking about TSMC. 

The global chip shortage began about three years ago as a series of trade conflicts between the US, China, Japan and South Korea disrupted semiconductor supply chains around the world. These relationship disruptions worsened during the pandemic, while demand for new chips skyrocketed as the markets for 5G, AI, data centers, electric vehicles and consumer electronics expanded. Adding to the chip shortage is a shortage of shipping containers, which is constricting commerce around the world. 

This influx of orders has caused TSMC's sales to grow by 25% in 2020 and analysts expect 18% growth this year. TSMC's best-selling model, 5nm chip is already being produced at full capacity, but most analysts and chipmakers expect the current chip shortage to last until 2023.

Fight between TSMC and Intel

TSMC, Samsung and Intel are the three largest chipmakers in the world. TSMC and Samsung make smaller chips than Intel - but TSMC's chips are stronger than Samsung's.

Intel's most advanced chips are larger in nanometers than TSMC's, but offer similar performance for most computing tasks because they have comparable transistor density. In other words, a 10nm chip produced by Intel can offer similar performance to a 7nm AMD chip produced by TSMC, but is larger and therefore more power-hungry.

Intel's inability to keep up with TSMC has sparked speculation that it will also become a lesser chipmaker like AMD, which outsources all of its manufacturing to TSMC and other foundries. Intel, however, recently dismissed those rumors by doubling the number of its own in-house foundries.

Price increases and possible delays

Faced with a seemingly endless stream of orders and rising costs, it would be logical for TSMC to raise its prices. TSMC cancelled most of its 2022 customer discounts earlier this year, and DigiTimes says it will raise its prices for orders due to be fulfilled in December. Prices for older models (larger than 16nm) will increase by 10%,while prices for newer chips will increase by 20%.

DigiTimes says TSMC's top customer, Apple, will continue to receive discounts, but its prices will still be raised by 3% to 5%. The report claims that Apple could pass those costs on to consumers with the iPhone 13. But again, we run into concerns stemming from predictions of sales of the new iPhone model, which could add to TSMC's burden. 

Several recent reports also suggest that the A16 Bionic chip for Apple's iPhone 14 in 2022 could be made with TSMC's 4nm process instead of the 3nm process as previously expected.

If these rumors are true, TSMC's 3nm process - which was scheduled to begin mass production next year - could be delayed. This may initially sound like a positive development for Intel, but Intel has ironically outsourced production of its upcoming laptop and data center chips to TSMC's 3nm process to address its own shortcomings and give its foundries more time to expand.

Is TSMC still a good investment?

TSMC shares have surged nearly 50% in the past 12 months as it has become the best way to benefit from the ongoing chip shortage. However, the stock still looks reasonable at 25 times future earnings and will remain the world's most important chipmaker for the future. At the same time, we are seeing an effectively diversified TSMC business as they have multiple models and all are selling more than satisfactorily. At the same time, we take into account the fact that TSMC intends to dramatically increase its investment in manufacturing innovation, which will help maintain its technological edge over its competitors. 

Investors should be aware of TSMC's risks - which include the hostility between China and Taiwan, its rising cost of capital, as well as growing competition from Intel, for example - but we believe that strengths still easily outweigh weaknesses.

*Source: Yahoo Finance