Early Tuesday morning, we learned that Apple (AAPL) is preparing to move production of its ultra-important A6X chip from Samsung to Taiwan Semiconductor (TSM). On December 10th, I noted the following regarding the now-confirmed rumor that Apple was experimenting with TSM's yield of the A6X:
"This rumor doesn't appear to be simple speculation. Apple and Qualcomm already unsuccessfully attempted to gain sole access to TSM's fab capacity, and TSM's gargantuan capital expenditure plans implies that the company is preparing for demand that would have a transformative impact on the firm's bottom line."
The giveaway, as bolded, was TSM's capital expenditure plans. Reported CAPEX was likely $9 billion in 2012, and analysts are projecting $11-12 billion in 2013. Given management's history of being conservative with its investments, this rapid increase in expenditures appeared to indicate that the firm was projecting an influx of a very high magnitude of demand.
Perhaps this explains some of the new expenditures.
The original rumor was that TSM would begin production of the A6X in the second half of 2013, but recent reports indicate that the shift will begin occurring in Q1 2013. This earlier than expected production shift implies that TSM has been preparing for this move for some time, and feels it has the necessary productive capacity to handle at least some of the order.
While Apple may not maintain more than 20 million quarterly iPad sales, largely in part to partial cannabilization from the iPad mini (which uses the A5), TSM's bottom line will benefit greatly as it gets more of the A6X order.
Far more important than the A6X order is the implications that this switch has for the future of the Apple-TSM relationship. While most of the earlier processors were designed with input from Samsung, and thus can't legally be produced by another manufacturer, TSM is the clear frontrunner for the 20nm version of the A7. The A7 of course being the likely the chip for the iPhone 6.
The impact that this move has on TSM's bottom line over the next two-three years is enormous. Management has historically been very reluctant to devote a large portion of its productive capacity to Apple's orders. In order to cope with these constraints, TSM appears to be engaging in a multi-year investment in its productive capacity. Up until this point, TSM's business has largely been scalable. However, in order to deal with this new dynamic, large spending plans are clearly necessary. Management's spending plans contrast with historical conservatism, implying the firm expects a big future.
At 17.5 times trailing earnings and a major shakeup underway, TSM's share price doesn't appear to reflect the long-term earnings benefit that Apple's move will ultimately bear. Though the stock is trading at its 52-week high, up a quick 6% from my recommendation in December, I still recommend investors purchase shares at current prices and on pullbacks.
Disclosure: I am long TSM.