Is TSM Stock a Buy?
When it comes to this chipmaker, invest based on fundamentals, not headlines, says Morningstar's analyst.
Taiwan Semiconductor Manufacturing (TSM) is the world’s largest dedicated contract chip manufacturer. It makes integrated circuits for customers based on their proprietary designs. TSM has long benefited from semiconductor companies around the globe transitioning from integrated device manufacturers to fabless designers--those that don’t have their own foundries. TSM, like all foundries, assumes the costs and capital expenditures of running factories in a highly cyclical market for its customers. Such cyclicality stems from the fact that foundries tend to add excessive capacity during times of burgeoning demand; this can result in underutilization during downturns, hampering profitability.
The rise of fabless semiconductor companies has supported the growth of foundries, which has in turn has encouraged increased competition. However, most of these newer competitors are confined to low-end manufacturing because of the prohibitive costs and engineering know-how associated with leading-edge technology. To prolong the excess returns enabled by leading-edge process technology, or nodes, TSM initially focuses on logic products, mostly used in central processing units and mobile chips, then focuses on more cost-conscious applications. This strategy is successful, illustrated by the fact that TSM is one of the two foundries still possessing leading-edge nodes when dozens of peers lagged.
We note two long-term growth factors for TSM. First, the recent consolidation of semiconductor companies is expected to create demand for integrated systems made with the most advanced nodes. Second, the organic growth of artificial intelligence, “Internet of Things,” and high-performance computing applications may last for decades. AI and high-performance computing play a central role in quickly processing human and machine inputs to solve complex problems like autonomous driving and language processing. Cheaper semiconductors have made integrating sensors, controllers, and motors to improve home, office, and factory efficiency possible.
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Phelix Lee does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.