Taiwan Semiconductor Manufacturing Company (TSM)
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Company Overview
Taiwan Semiconductor Manufacturing Co. (TSM) is the largest dedicated contract semiconductor manufacturer in the world, with roughly 50% market share. The company handles the manufacturing of semiconductors and integrated devices for companies that don’t have their own manufacturing facilities (“fabless” or “fab lite” producers). TSM produces more than 10,760 products using more than 270 technologies for about 500 customers. TSM’s fabless customers include AMD, Broadcom, NVIDIA, QUALCOMM, Hisilocon Tech, and Intel.
Most of TSM’s manufacturing capacity is in Taiwan, but it also has factories in Taiwan, China, and the US. US customers account for roughly 60% of revenue, followed by China (20%) and Taiwan (10%).
TSM’s revenue is closely tied to its 10 largest customers, who account for more than 70% of net revenues to the firm. The company’s single largest customer (Apple Inc) accounts for more than 25% of revenue.
TSM is investing heavily (Capex $24 billion LTM) to install and expand capacity, particularly for 5nm and 3nm nodes, and advances packaging and mask operations.
Investment Thesis
TSM is an industry leader dominating semiconductor fabrication (50% market share) in a time where everything from computers to dishwashers is requiring smaller and smaller chips. TSM presents an impressive value creation play with an ROIC/WACC ratio of 1.35 with very high revenue growth and a focus on capacity expansion. TSM is on track for 20% revenue growth in 2022 with a wide competitive moat as one of only three companies that can produce wafers under 10 nanometers.
TSM also provides proxy exposure to all fabless semiconductor majors and broad electronics companies like Apple (25% of revenue) and Sony. This hedges security selection risk for our other semiconductor names. On the note of diversification, TSM is quasi-diversified by country with only 60% of revenues denoted in USD.
Our bullish stance on TSM is framed by our macro view of increasing semiconductor demand from structural sources including electric vehicles, autonomous driving, cryptocurrency mining, metaverse/virtual reality, decentralized energy systems, and the ongoing improvement of computing infrastructure globally.
TSM is a first-mover on sustainability practices and has proven its dedication to the reduction of energy consumption and waste production by saving 200 GW of electricity in 2020 despite increasing production of the extremely energy-intensive 5nm chip. They have passed these energy conservation requirements to their top 7 suppliers as well in an effort to develop a sustainable supply chain.
If demand for semiconductors does slow down in the near term, we believe TSM will prove resilient compared to its peers and this reduction in demand will reflect in Capex but have a limited effect on top-line growth.