Taiwan Semiconductor Manufacturing Company, better known as TSMC, is a strong growth play over the next few years, and will benefit from both industry trends and company specific strategic advantages, offering investors a sound investment. Given TSMC’s 56% hold on the foundry market, it maintains competitive advantages of both pricing and scale, which allows it to hold a position of power both with customers and against its competitors. Over the next few years, TSMC should provide investors a safe return given its increasingly important role in everyday technologies.
TSMC’s dominance in the 7nm chip space underscores its relative strength and safety going forward. It indicated 50 7nm tape-outs by 2018, and is expected to dominate the industry within this chip category in 2018 and 2019. On this front, TSMC possesses two key competitive advantages: technology and production cost. TSMC is consistently setting the industry standard for chip technology, and operates at 20% lower costs than competitors Intel or Samsung. Because of this, TSMC 7nm chips end up being cheaper for customers than a competitor’s 10nm chip.
Over the next few years, the semiconductor industry will transition from a smartphone focus into high-performance chips (HPCs) for use in artificial intelligence and Internet of Things capabilities. TSMC currently holds a 30% market share of an 11.7Bn market share opportunity of silicon manufacturing, which positions it well to capitalize on this industry growth going forward. From 2016 to 2021, TSMC predicts a ~20% CAGR for IoT-related revenue, which should drive the stock price beginning in 2019.
A fundamental analysis of TSMC yields reasonable upside for a robust growth investment. Using a 9% cost of capital and 9.5% revenue CAGR with a 9x terminal multiple over the next five years yields about a 16% potential upside in addition to its 2.73% dividend yield. This model assumes slight gross margin expansion in 2021 to 74.5% while keeping other factors relatively constant. In summary, TSMC is a good long term bet that has significant potential to capitalize on secular industry trends given its strong competitive positioning.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.