- TSM should consistently earn higher gross margins than competitors, thanks to its economies of scale and premium pricing justified by cutting-edge process technologies.
- The company wins when its customers compete to offer the most advanced processing systems using the latest process technologies.
- TSM will benefit from more semiconductor companies embracing the fabless business model and internet giants designing their own data center chips.
- Although TSM is the foundry leader, each generation of process technology matures and commoditizes quickly, forcing the company to deal with pricing pressure.
- The company's new approach to diversify production geographically may add cost pressures with little added resilience in stability.
- Samsung has significantly improved its foundry offerings and is now arguably on a par with TSM. State-supported Chinese foundries are also potential threats.
- The war in Ukraine has sparked worries about raw material supply and incursions into Taiwan.
Morningstar Analyst Phelix Lee Says
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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