Taiwan Semiconductor: The Saudi Arabia of Chips
Even great companies' stocks can't go up forever.
Oil has Saudi Arabia. Microchips, the world has suddenly realized, have Taiwan Semiconductor Manufacturing Co. That revelation has turned a once-sleepy stock into a hotshot. Taiwan Semi’s shares (ticker: TSM) have leapt 70% over the past six months, pulling it past Chinese internet sensations Tencent (700.Hong Kong) and Alibaba (BABA) as the biggest company in emerging markets.
Lots of companies design cool semiconductors: Intel, Nvidia, Broadcom, and others. But they increasingly contract Taiwan Semi to manufacture them. In industry terms, the company is the dominant global foundry, at least for the smart chips that operate things. Now it’s the choke point in shortages like the one currently afflicting auto makers around the world. The U.S. share of semiconductor manufacturing dropped from 37% to 12% over the past 30 years. The most lucrative part of that has headed for Taiwan.
There is a lot to like about Taiwan Semiconductor. It offers lifetime employment and invests like crazy for the future. You’ve never heard of its CEO, and that’s a good thing. (He’s C.C. Wei, for the record.) All it’s ever wanted to be is the best damn microchip foundry in the world, and it is. If you like Apple (AAPL), you’ll love Taiwan Semi, which earns about 20% of its revenue from the iPhone and related products. The two companies are moving into the future together with joint development of new displays for augmented reality devices, Nikkei Asia recently reported.
But semiconductors, like oil, is a cyclical business. Demand grows at a measured pace over time, with plenty of spurts and lulls. It’s not a new phenomenon — like, say, social media or e-commerce— that can grow astronomically while billions of people adopt it. So a 70% run for a stock that grew steadily but slowly for years previous should cause some concern.
Taiwan Semi was being dragged unwillingly into geopolitics even before the auto chip shortage. A top customer just below Apple is Huawei, the Chinese phone equipment power that became a bete noire for the Trump Administration (and not only them). The Taiwanese foundry spent much of last year bobbing and weaving around U.S. restrictions on exports to Huawei. Now leaders around the world are pressuring Taiwan to pressure Taiwan Semi to favor their carmakers when doling out supply, an outsized headache for a category that only accounts for 3% of sales, according to Colin Gillis, who watches global tech for New York-based hedge fund advisor Chatham Road Partners.
The auto chip mini-crisis may spur long-term challenges to Taiwan Semi’s hegemony, sort of the way rising oil prices ignited the U.S. shale revolution 10 years ago. No fewer than 16 U.S. industry associations just urged President Biden to “invest boldly in domestic semiconductor manufacturing incentives.” Biden’s people promised an executive order along these lines. More concretely, Asian rivals Samsung (005930.Korea) and MediaTek (2454.Taiwan) are investing heavily in chips tailored to 5G telephony, which should rev up in earnest over the next year or two.
But the most imminent threat to Taiwan Semi’s valuation is the natural gravity of demand. It’s firing on all cylinders right now. Industry, autos and others, is restocking the inventories it slashed during the darkest days last spring. Stuck-in consumers keep buying gadgets to ease isolation. Personal computers had their best year in a decade in 2020, sales jumping more than 10% . iPhone sales climbed by 10 million.
This probably can’t last forever. Taiwan Semi is meanwhile doubling down, almost literally, on its own R&D spending, targeting up to $28 billion in capex for 2021. That may pay off over time, but it’s well more than a year’s profit. The bottom line has got to take a hit.
If you’re just hearing about Taiwan Semiconductor, you’ll hear more in the future. But it may be a little late to cash in on this stock run.