It’s no exaggeration to call Taiwan Semiconductor (NYSE:TSM) the most important company in the world. What does this mean for TSM stock?
While Intel (NASDAQ:INTC) has failed to master the 7-nanometer (nm) chip process, TSMC (as it’s known) has delivered over 1 billion 7nm chips. It’s seeing lower defect rates on 5nm than it did at this point in its 7nm development. It’s already ramping up for 3nm production by the end of 2022 and has begun working on the 2 nm process.
The closer you can get circuits on a chip, the faster the chip can be. At 2nm, we’re talking about 20 angstroms. A anstrom is usually used to measure wavelengths of light.
The key to TSM’s progress is its mastery of the arcane Extreme Ultra Violet (EUV) process, where it has half the world’s installed base and 60% of its production.
Best of all, if you’re looking to invest in semiconductors, the stock isn’t expensive. There’s a reason for that.
TSM Stock and the Company’s Lead
When trading opened Aug. 31, TSM stock was trading at $79 per share at a hefty price to earnings ratio of about 27x. But the company offers a dividend yield of 2.11%.
TSMC’s revenues are 15% ahead of last year’s, and its lead on rivals is growing. Second quarter revenue was up 34% year over year, despite the novel coronavirus pandemic. It’s helped by the fact that Taiwan beat back the virus ahead of many countries.
Over the last year TSM shares are up 85%, and most of the gains have come just since July. TSM stock is just killing it at the high end of the market. Its High-Performance Computing revenues are growing at 12% per quarter, even while other markets like smartphones falter.
It’s not just Intel that’s sucking wind behind TSM. Global Foundries has completely given up on high-end computing, and Samsung (OTCMKTS:SSNLF) may not catch up for 10 years.
The China Threat
If Taiwan Semiconductor were based in, say, Arizona, it would be a more expensive stock.
The fact that it’s in Taiwan puts it on the very edge of U.S.-China relations. Its lead in chip making may be as important to Taiwan’s independence as the U.S. military shield.
China is working hard to take that lead away. China’s state-owned semiconductor makers have hired away 100 top TSMC engineers with lavish pay packages. Taiwan engineers are being offered raises of 250% to jump the Taiwan strait. One Chinese chip effort alone has a capital budget for this year of $6.7 billion.
China isn’t just playing with money. State-based hackers have also reportedly infiltrated TSM computers, seeking the company’s secrets. They’re not just grabbing TSM’s intellectual property, but that of its customers, like Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD)
But the Chinese companies are two whole generations behind TSMC. They’re working at 12nm and 14nm, while TSMC has mastered the art at 7nm. Construction plans have been delayed. One of the companies, in Wuhan, is described simply as a mess.
The Bottom Line
China can’t move against Taiwan until it can replace what Taiwan Semiconductor does.
Taiwan Semiconductor recognizes the threat. It is working with the Trump Administration to build a big new plant in Chandler, Arizona. That work is likely to continue regardless of November’s results.
TSMC chairman Mark Liu talks about being close to customers and drawing from a big talent pool. But the deal won’t be done until TSMC is assured its costs won’t rise.
Taiwan Semiconductor is on a knife edge, caught between the decade’s ambitions of China and the U.S. That’s why the stock isn’t flying higher than it is. If you invest in the company today, you’re betting this can all be managed.
It’s a bet I’m willing to make.
On the date of publication, Dana Blankenhorn held a long position in TSM, INTC and NVDA.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.
