To The Moon

Summary

• TSMC's stock price has struggled to recover, but investors should accumulate it due to the semiconductor industry's recovery and TSMC's unique competitive position.

• The semiconductor industry is seeing the bottom in demand, and TSMC's revenue has been showing signs of improvement.

• TSMC is the only major fabrication company that does not compete with its own customers, giving it a strong advantage over potential newcomers like Intel.

BING-JHEN HONG

Introduction

Volatility is arguably inevitable when investing in tech companies. This is especially true for semiconductor players as the industry is heavily reliant on macroeconomic conditions. Perhaps, as a result of this inherent business cycle, TSMC's $Taiwan Semiconductor Manufacturing(TSM)$ stock price has been struggling to recover to its pandemic time highs as the economy started to slow from the pandemic peak. Yet, I believe investors should be accumulating TSMC at these levels for two major reasons. One, the overall semiconductor industry's business cycle has likely hit its trough and eyeing a rebound in sequential growth. This process may be lengthy and bumpy, but I believe the return to growth is a question of when not if. Two, TSMC's unique competitive position as the sole fabrication company creates a strong layer of insulation against a potential newcomer, Intel (INTC). This advantage likely creates a synergy with the company's technological prowess that it enjoys today. Therefore, considering these factors, I believe investors should be accumulating TSMC stock. TSMC is a buy.

Semiconductor Industry's Business Cycle

The first potential tailwind TSMC may enjoy in the coming quarters is the semiconductor industry's recovery. During the pandemic, demand for both electronics hardware and software skyrocketed pulling the demand for semiconductors that power these forward, and as a result, the demand has quickly dissipated, which was aided by slowing growth following the easy monetary and fiscal policies during the pandemic. However, today, the semiconductor industry is seeing the bottom in demand.

TSMC

[Chart created by author using Source]

TSMC releases monthly revenue data, so using the released data, I created a chart above, which shows a clear trend. After hitting the relative bottom during March and April, the company's year-over-year performance has been showing consistent signs of improvement. This argument is further supported by the TSMC management team's positive future outlook. During the 2023 Q2 earnings call, the management team said that the company "expect[s] [the] third-quarter revenue to be between NT16.7 billion and $17.5 billion, which represents a 9.1% sequential increase at the midpoint."

TSMC is not the only company forecasting a brighter future going forward. This is the case for numerous major players within the semiconductor industry. Analysts are forecasting that AMD $Advanced Micro Devices(AMD)$, Intel, and Samsung $Samsung Electronics Co., Ltd.(SSNLF)$ will all start to see year-over-year revenue growth returns after fiscal 2023. Although one must note that the business cycle is highly dependent on macroeconomic conditions and is subject to some levels of volatility, I believe it is reasonable to argue that the semiconductor industry's recovery will create a tailwind for TSMC going forward.

TSMC's Unique Advantages

On top of the potential tailwind starting to form in the industry, TSMC has a competitive advantage. To be exact, the company has two unique major advantages.

First, TSMC is the only major fabrication company that does not compete with its own customers. During the 2022 Technology Symposium, TSMC CEO, Dr. C.C. Wei, said TSMC will "never compete with you, because we don't produce any of our own products. We remain committed to building long-term strategic partnerships with each and every one of you." Today, more than ever before, this statement and a promise are valuable to TSMC as it creates a strong moat.

In the semiconductor fabrication industry, there are two major players. TSMC, the market leader, and Samsung. The market has found status quo with TSMC dominating the market and Samsung attempting to play catch-up. However, today, Intel is on the brink of entering the competitive landscape that has started with the company's aggressive turnaround during the pandemic likely creating a more competitive market.

Understanding the current competitive situation in the fabrication industry, it is evident that TSMC will likely hold its market leadership. Both Intel and Samsung fiercely compete with fabless chip producers. For example, Intel competes with AMD in the CPU market and Nvidia $NVIDIA Corp(NVDA)$ in the GPU market. Samsung competes with Qualcomm $Qualcomm(QCOM)$ in the mobile chip market with its Exynos and Apple $Apple(AAPL)$ in the smartphone market. The sheer size of these two companies creates numerous conflicts of interest with the significant potential future customers. To name a few more, Google's $Alphabet(GOOG)$ autonomous driving arm, Waymo, competes with Intel's Mobileye $Mobileye Global Inc.(MBLY)$, and Samsung's display and image sensor business competes with LG Electronics and Sony $Sony(SONY)$. As such, because both Intel and Samsung compete with fabless companies, tech companies that design their own chips, or compete with end-product companies, numerous firms will likely be hesitant to rely on Samsung and Intel relative to TSMC which does not have these conflicting interests.

While I do believe that TSMC not having a conflicting interest with its competitors is a major advantage, due to the reduced risks and geopolitical tensions in the Taiwan Strait, this is likely not a silver bullet. But, I do believe it to be significant.

Finally, TSMC currently holds an early-mover advantage as the industry leader, and this will likely be the case for the foreseeable future. Samsung and Intel are aggressively investing in the future of semiconductor fabrications, but their own goals suggest that TSMC still holds competitive advantages with an expectation for this to continue for the foreseeable future.

In June 2023, Samsung's management team "vowed to overtake the Taiwanese rival in five years." Samsung's goal to overtake TSMC in the next five years could also be translated as Samsung acknowledges and accepts that TSMC is ahead of them by a fairly wide margin. Similarly, Intel is targeting 2025 as the year that the company regains its leadership from TSMC, which could also be viewed as TSMC currently holding the reign.

Therefore, I believe this unique advantage TSMC holds creates synergies and provides the company with an upper hand in the market. Not only can TSMC freely acquire customers without the customers worrying about the conflict of interest, but the company also holds the technological leadership in the industry today with no clear sight of an end to the current leadership.

Risk to Thesis

TSMC currently holds the technological leadership in the semiconductor fabrication industry, but one of the major risks is the fierce brewing competition from Samsung and Intel as these companies vow to become the market leader. Even in a perfect world for Samsung and Intel, the dethroning of TSMC is not expected to happen in the near-term, but investors should be wary of the competitive pressure.

Summary

The semiconductor industry's business cycle has been the biggest headwind facing TSMC in the past few quarters. However, the tide is starting to change, and the company is prepared to be one of the biggest beneficiaries of the changing tide. The semiconductor industry is starting to recover from the depressed demand seen during 2022 and 2023 with an expectation for this trend to continue for the foreseeable future. TSMC will likely benefit from this tailwind as the company is unique in a way by not competing with its customers creating a conflict of interest, which is the case for its biggest competitors. Further, TSMC currently holds technological leadership in the industry with an expectation for this to continue for the foreseeable future. Therefore, I believe investors should be accumulating TSMC.

Source: Seeking Alpha