We are starting off decisively: We think Taiwan Semiconductor Manufacturing Company or TSMC is the best semiconductor stock to buy. Here’s why we think so.
1) TSMC is perhaps The World’s Most Important Company
TSMC created the semiconductor dedicated foundry business model when it was founded in 1987. TSMC manufactures more than 12,000 products for various applications covering a variety of end markets including smartphones, high performance computing, the Internet of Things (IoT), automotive, and digital consumer electronics.
TSMC is the most valuable semiconductor company in the world and also the largest foundry in the world, producing 53.6% of the world’s semiconductor chips by revenue with Samsung a distant second at 16.3% and UMC at 6.9%. Chinese semiconductors SMIC and Hua Hong Semi are at 5.6% and 3.2% respectively.
In addition, market analysts estimates that TSMC now manufactures more than 90% of the advanced chips supply in Taiwan as opposed to ten years ago where Intel was the world’s leading chip maker but that is no longer the case today.
2) TSMC is expanding capacity…and in the right place
Annual capacity of the manufacturing facilities managed by TSMC exceeded 13 million 12-inch equivalent wafers in 2021. These facilities include four 12-inch wafer GIGAFAB® fabs, four 8-inch wafer fabs, and one 6-inch wafer fab – all in Taiwan – as well as one 12-inch wafer fab in Nanjing and two 8-inch wafer fabs in the United States and Mainland China .
In December 2021, TSMC established manufacturing facilities in Kumamoto, Japan which will construct and operate a 12-inch wafer fab, with production targeted to begin by the end of 2024. Meanwhile, the company continues to execute its plan for an advanced semiconductor fab in Arizona, the United States, with production targeted for 2024 and 2026.
The first plant in Arizona is expected to begin producing chips by 2024. It was initially slated to produce 5 nanometer chips, but now will create 4 nanometer chips. The second plant will open in 2026 and produce 3 nanometer chips, the most cutting-edge chips currently available.
When both plants are completed, TSMC estimates annual revenue of $10 billion from an annual production of 600,000 wafers.
TSMC’s biggest customer is Apple. Apple pivoted from Samsung and Intel in the past. Recently, Apple’s suppliers has added manufacturing operations in the US as Apple is having to reshape its supply chain as it seeks to be less reliant on China. With Samsung and Intel also adding manufacturing operations in the US, TSMC has to do the same so this is not a differentiating point.
3) TSMC is benefitting from the US Chips Act
US President Biden signed the CHIPS and Science Act into law in early August, allocating billions to lure manufacturers to produce semiconductor chips domestically. The law includes $52.7 billion in loans, grants and other incentives as well as billions more in tax credits to encourage investment in U.S. semiconductor manufacturing.
TSMC recently announce the opening of the company’s second chip plant in Arizona, raising its investment in the state from $12 billion to $40 billion.
The company also announced it will be producing more technically advanced chips than originally proposed. The investment by TSMC is one of the largest foreign investments in U.S. history, and the biggest in the state of Arizona.
This investment by TSMC and the agreement to produce more technically advanced chips in US would not only benefit the US but also TSMC as they would be closer to their customers and also receive billions in grants and tax incentives.
It is also possible that by investing more in the US, TSMC is diverting these grants from its competitors to itself.
4) Buffett bought TSMC
Berkshire Hathaway acquired about 60 million American depository receipts in TSMC in the three months ended September 2022. Assuming Buffett bought TSMC’s ADRs at the average price for the third quarter, the stake would have cost him $5.1 billion.
Buffett’s TSMC buy is significant because it is his first investment in the semiconductor sector.
Buffett is a well-known value investor and while TSMC’s shares had been in a free fall, losing more than 50% of their value from the peak of $145 to the trough of $60, the company was posting excellent results.
We know Buffett likes companies with strong competitive moats, and Taiwan Semiconductor’s profit margins reflect a very strong moat, which appears to be getting even stronger. Not only is the ten year average operating margin an impressive 38%, but it has recently increased to close to 50%.
In addition to a strong moat, Taiwan Semiconductor has been delivering impressive growth too. Revenue for 3Q22 was up 36% year over year, and the company guided 4Q22 revenue to be up approximately 29% year over year. In the past decade it has increased revenue from a little over $15 billion to over $66 billion.
This has been due to market share gains, and growth in the end markets it serves, many of which have important secular tailwinds. Some of the key end markets for Taiwan Semiconductor include smartphones, high-performance computing and data centers, Internet of Things devices and automotive.
Closing statements
We have shared 4 reasons which makes TSMC is the best semiconductor stock to buy. This is because the company is the world’s most important semiconductor company and perhaps even the world’s most important company. It is also expanding capacity at a rapid pace, not only in US where it is benefiting from the US Chips Act in the form of grants and tax incentives but also in other countries such as Japan. Lastly, when Warren Buffett invests US$ 5 billion into one stock in just one quarter, you know you should also consider the stock.
Before we conclude, you may wonder why not buy ASML instead?
Afterall, TSMC’s success can be attributed to its early adoption of ASML’s extreme ultraviolet (EUV) lithography systems. ASML is the only manufacturer of EUV systems, which are used to etch circuit patterns on silicon wafers for the smallest and densest chips in the world.
Its because ASML’s most cutting-edge EUV lithography machine has been blocked for shipment to China’s chipmaking champion Semiconductor Manufacturing International Co. since late 2019 due to U.S. pressure and ASML has a hard time being stuck in between the political friction of both countries.
On the other hand, at the recent APEC event held in Thailand, TSMC Founder Morris Chang has met US Vice President Kamala Harris and also Chinese President Xi Jinping, even congratulating him on the success of the 20th party congress. This, together with TSMC’s recent capacity expansions into the US shows that TSMC is probably better at managing the current geopolitical tensions.
