Taiwan Semiconductor (NYSE:TSM) stock is in the catbird seat in such a way that vauation isn’t a problem right now.
America is dependent on the company’s chip-making technology, and anxious to see it build more plants here.
China is also dependent on Taiwan Semiconductor’s technology. Germany and Japan both want Taiwan Semiconductor fabs.
Taiwan Semiconductor, known as TSMC, has perfected extreme ultraviolet lithography (EUL) techniques that will let it make chips with circuit lines just 2 nm apart. That’s thinner than a strand of DNA.
TSMC’s dominance in EUL gives it enormous political as well as economic power. Withholding this power from China, and depositing it in the Arizona desert, is a very big deal.
It means China is dependent upon Taiwan. C.C. Wei is, in that way, more powerful than Xi Jinping.
A Closer Look at TSM Stock
After writing about TSMC’s growing importance for years, I finally put some shares into my retirement account a year ago. They have more than doubled in value.
On July 16 TSMC had a market cap of $609 billion. Intel (NASDAQ:INTC) was worth $275 billion.
The only other players in microprocessor fabrication are Samsung Electronics (OTCMKTS:SSNLF), worth about $469 billion, and Global Foundries, which Intel may buy for just $30 billion.
As circuit lines get closer together, the technology needed to make chips grows more precious. Consolidation into a virtual monopoly was always inevitable.
The only way to get past 2 nm is through techniques like quantum computing, which is still not commercial.
Overpriced?
Every leading maker of processing chips, even Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NYSE:AMD), is dependent upon TSMC.
It’s TSMC’s drive to fulfill those orders, and to build the Arizona plant now due to open in 2024, that is keeping not their stock prices high, and Apple (NASDAQ:AAPL) as well.
So how can TSM stock possibly be overvalued? Our Will Healy suggests its power may have peaked, that the chip shortage should ease, and that TSMC’s ambitions will naturally be hampered by geopolitics.
The Arizona plant, after all, will represent just 2% of the company’s production. Most production will remain in Taiwan, and Healy takes China’s threats to invade seriously.
I don’t. A Chinese invasion of Taiwan would plunge the whole world into economic and technological darkness. Social cohesion in China remains tied closely to the country’s continued economic progress.
You tell the Chinese they’re going to be poor again for the Party and you had better duck.
Analysts at Tipranks have also cooled to TSM stock. Only five now follow it, and only three say buy it. This despite the average revenue estimate for 2022 being $74 billion, 32% ahead of 2021 estimates.
Profit margins must fall as chip shortages ease, the thinking goes.
The Bottom Line
The world’s economic dependence on TSMC, and by extension Taiwan, is deeply ironic.
It’s assumed to be short-term. Samsung and Intel must eventually catch up. Both the U.S. government and China’s government are pouring billions into semiconductor development to make that happen.
But Intel has been claiming to have EUL licked since 2018. It’s not licked yet. Intel stock costs less today than it did a year ago.
Money alone won’t solve the problem. China’s billions haven’t cracked it. America’s billions haven’t cracked it, either. Until Intel delivers on its promises to compete with TSMC, I’m sticking with it, but I’m holding some Intel, too, just in case.
On the date of publication, Dana Blankenhorn held a LONG position in TSM, INTC, NVDA and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.
