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TSMC Ltd
August 3, 2024
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September 23, 2024 | Total Return: +25.09%
ORIGINAL ARTICLE
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Taiwan Semiconductor Manufacturing
Ticker: TSM.NYSE
Addition to:
✅ SENSU Watchlist
Addition Date: August 3, 2024
Price per Share: 149.86 USD
TABLE OF CONTENTS
THE COMPANY
When I ponder the evolution of the semiconductor industry over the past few decades, Taiwan Semiconductor Manufacturing Company (TSMC) stands out as a transformative force. Founded in 1987, TSMC didn't just join the chip-making game - it fundamentally changed how it was played.
In the early days of the semiconductor boom, vertically integrated companies ruled the roost. Giants like Intel and IBM designed chips and manufactured them in-house. Enter Morris Chang, TSMC's visionary founder, who saw an opportunity to specialize. His idea? Create a "pure-play" foundry dedicated solely to manufacturing chips for other companies.
This concept, revolutionary at the time, addressed a growing pain point in the industry. As chip designs grew more complex and fabrication more costly, many companies found it increasingly difficult to keep pace with both design innovation and manufacturing advancements. TSMC's model allowed these firms to focus on what they did best - design - while leveraging TSMC's cutting-edge manufacturing capabilities.
What strikes me about TSMC's approach is its elegant simplicity. By eschewing chip design and focusing exclusively on manufacturing, the company positioned itself as a trusted partner rather than a potential competitor. This strategy helped TSMC win the confidence of major players in the tech industry, from Apple and Qualcomm to Nvidia and AMD.
TSMC's rise parallels Taiwan's broader economic transformation. As the island nation shifted from low-cost manufacturing to high-tech industries, TSMC emerged as the crown jewel of its burgeoning semiconductor sector. The company's success helped create a robust ecosystem of talent and ancillary businesses, cementing Taiwan's status as a global tech hub.
What impresses me most about TSMC is its relentless pursuit of technological advancement. The company has consistently pushed the boundaries of semiconductor process technology, often being first to market with new manufacturing nodes. This technological leadership, combined with its massive scale, has created a virtuous cycle that reinforces TSMC's dominance.
The foundry model pioneered by TSMC has reshaped the semiconductor landscape. It enabled a new breed of "fabless" chip designers, spurring innovation and competition in the industry. Today, some of the world's most advanced chips - powering everything from smartphones to supercomputers - roll off TSMC's production lines.
STOCK PRICE
The dynamic background color reflects overall market valuation, allowing you to quickly assess both stock-specific trends and market conditions at a glance.
Why logarithmic? It displays percentage changes uniformly, making price movements easily comparable across different ranges. A 100% increase appears the same whether from $10 to $20 or $100 to $200.
FINANCIAL ANALYSIS
⭐⭐⭐⭐ Quality Score | ⭐⭐⭐ Value Score | ⭐⭐⭐⭐⭐ Growth Score |
TSMC's earnings yield shows a fluctuating trend from 2017 to 2023. After peaking at 8.41% in 2022, it dropped to 5.15% in 2023, reflecting a challenging year for the semiconductor industry. Despite this decline, TSMC outperformed the foundry industry, with advanced technologies (7nm and beyond) accounting for 58% of total wafer revenue. The company's focus on innovation, including the launch of 3nm technology and continuous enhancements, positions it well for future growth. The trailing twelve months (TTM) yield of 3.70% suggests ongoing industry challenges.
Earnings Yield
Taiwan Semiconductor's Price-to-Book ratio peaked at 8.58 in 2020, reflecting high investor optimism. It then declined to 4.78 in 2023, suggesting a market correction. The recent TTM uptick to 6.68 indicates renewed investor confidence. Despite fluctuations, TSMC's PTB remains above its 2018 low, signaling sustained market premium for its assets and growth potential.
Price-to-Book Ratio
The company's 10-year and 3-year ROIIC stands at an impressive 25.03%, while the 5-year ROIIC is slightly lower at 21.05%. These figures consistently rank TSMC in the top quartile of its industry, with percentile rankings above 76% across all time frames. This trend indicates TSMC's ability to efficiently allocate capital and generate substantial returns.
10-Years | 5-Years | 3-Years | |
|---|---|---|---|
ROIIC | 25.03% | 21.05% | 25.03% |
Ranking | 81.56% | 76.67% | 81.56% |
MANAGEMENT ANALYSIS
C.C. Wei is the CEO of Taiwan Semiconductor Manufacturing Company (TSMC), the world's largest semiconductor foundry. Wei has been with TSMC since 1998 and became CEO in 2018 after previously serving as Co-CEO and President.
Under Wei's leadership, TSMC has solidified its position as the dominant player in the semiconductor industry. The company is known for its cutting-edge technology and has been the exclusive supplier of Apple's A-series chips for iPhones and iPads since 2016. Wei has guided TSMC through a period of unprecedented growth and success.
One interesting story about Wei is that he almost joined Intel early in his career. After earning his Ph.D. in electrical engineering from Yale, Wei had job offers from both Intel and TSMC. He ultimately chose TSMC because he wanted to work for a pure-play foundry and was impressed by TSMC's commitment to being a neutral supplier to all customers. This fateful decision set Wei on the path to eventually leading the company.
Wei is known for his technical expertise, strategic vision, and humble leadership style. He has emphasized the importance of staying at the forefront of technology while maintaining strong partnerships with customers.
Employee Sentiment
The Positives
Employees consistently praise TSMC for its competitive compensation, including high salaries, bonuses, and profit-sharing. Many highlight the opportunity to work with cutting-edge semiconductor technology and learn from industry leaders. The company is seen as stable and financially strong, providing job security. Some employees appreciate the challenging work environment that pushes them to grow professionally. TSMC's reputation as a top semiconductor manufacturer is a source of pride for many workers. The company is also credited with providing good benefits, particularly in Taiwan.
The Negatives
The most common complaint is poor work-life balance, with many employees reporting extremely long working hours, high pressure, and expectations to be available at all times. The work culture is often described as militaristic, with strict top-down management and little room for autonomy or creativity. Many employees, especially in the US, struggle with the company's rigid, hierarchical structure and communication issues stemming from language and cultural barriers. There are frequent mentions of micromanagement, unrealistic deadlines, and a lack of recognition for hard work. Some employees feel there is favoritism towards Taiwanese workers and discrimination against non-Taiwanese employees. The company's focus on efficiency and productivity is seen by some as coming at the expense of employee wellbeing and ethical considerations.
“Pay is good if you can get an S+ or higher on annual review. (I=bad, S=mid, S+=above average, O=outstanding , top 5%) ... Extremely poor training. If cannot learn yourself, this place is terrible for you. ... No Hope of Hybrid schedule - Management has made it very clear they will not introduce a hybrid schedule anytime soon.”
"My experience at TSMC Arizona has been challenging, with issues of discrimination amongst engineers, a severe workload, and a lack of recognition.... TSMC presents itself as a leader in technology, but there are systemic problems that need addressing. There is an undeniable bias in hiring and treatment, favoring Taiwanese locals and assignees over American employees. This bias is not subtle; it's supported by leadership, and evident throughout the departments, creating a sense of inferiority among American staff."
MOST SIGNIFICANT MOATS
TSMC's most crucial moat is its technological edge. The company consistently leads in developing cutting-edge semiconductor manufacturing processes. For example, TSMC was the first to mass-produce 5-nanometer chips and is working on even more advanced 3-nanometer and 2-nanometer technologies. This leadership allows TSMC to produce smaller, faster, and more energy-efficient chips than its competitors. For customers, this means access to the most advanced chip designs, giving them a competitive edge in their respective markets. This technological advantage is hard for competitors to replicate quickly, as it requires massive investments in research and development and years of expertise.
TSMC's enormous scale of operations is its second most important moat. As the world's largest dedicated semiconductor foundry, TSMC can spread its fixed costs over a larger production volume, reducing the cost per chip. This scale allows TSMC to invest more in research and development and advanced equipment while still maintaining competitive pricing. The company's manufacturing efficiency, honed over decades, enables it to produce chips with higher yields (the percentage of usable chips from each wafer) than many competitors. This efficiency translates to lower costs and higher profitability, making it difficult for smaller competitors to match TSMC's pricing while maintaining similar profit margins.
TSMC has built strong, long-term relationships with many of the world's leading technology companies, including Apple, Nvidia, and Qualcomm. These relationships are not just about manufacturing chips; TSMC works closely with its customers to co-develop technologies and optimize designs. This collaboration creates a virtuous cycle: as TSMC's capabilities improve, its customers can design more advanced products, which in turn drives demand for TSMC's most advanced processes. The ecosystem TSMC has built around its manufacturing capabilities, including partnerships with equipment suppliers and design tool providers, further strengthens these relationships and makes it challenging for customers to switch to other foundries.
MOST SIGNIFICANT RISKS
Risk: Escalating tensions between China and Taiwan pose a significant threat to TSMC's operations.
Impact: A potential conflict could disrupt production, damage facilities, or even lead to a loss of control over the company's assets. This would severely impact TSMC's ability to manufacture chips and fulfill customer orders, potentially causing a global semiconductor shortage.
Mitigating Factor: TSMC is expanding its manufacturing presence outside of Taiwan, including building new facilities in the United States and Japan. This geographical diversification helps reduce the company's reliance on its Taiwan-based operations.
Risk: Rapid advancements in semiconductor technology or the emergence of new computing paradigms could challenge TSMC's market position.
Impact: If TSMC falls behind in technological innovation, it could lose market share to competitors or see reduced demand for its services. This would negatively affect the company's revenue and profitability.
Mitigating Factor: TSMC invests heavily in research and development to maintain its technological edge. The company also collaborates closely with its customers and equipment suppliers to stay at the forefront of semiconductor technology.
Risk: TSMC relies on a complex global supply chain for raw materials, equipment, and components.
Impact: Disruptions in the supply chain, whether due to natural disasters, trade disputes, or other factors, could lead to production delays, increased costs, and potential revenue losses.
Mitigating Factor: TSMC works to diversify its supplier base and maintains strategic inventory levels to buffer against short-term disruptions. The company also invests in long-term partnerships with key suppliers to ensure a stable supply of critical materials and equipment.
CATALYSTS FOR GROWTH
TSMC is well-positioned to benefit from the growing demand for AI chips. As noted in the 2023 annual report, "Generative AI took the world by storm" and TSMC is "a key enabler of AI applications." The company's advanced process technologies and high-yield manufacturing capabilities make it an ideal partner for producing AI chips, which require leading-edge technologies and larger die sizes.
TSMC's 3nm technology entered high volume production in 2023, with "even greater contribution" expected in 2024 and beyond. The 2nm technology is on track for volume production in 2025. These advanced nodes should drive higher revenue and margins, as they typically command premium pricing.
TSMC is expanding its manufacturing footprint globally, with new fabs planned or under construction in the US, Japan, and Germany. This expansion could increase customer trust, open up new markets, and potentially mitigate some geopolitical risks associated with having most production concentrated in Taiwan.
Disclaimer: The information provided in this newsletter is for educational and informational purposes only and does not constitute financial, investment, or legal advice. The content is solely the opinion of the author, who is not a qualified financial advisor, investment professional, or legal expert. All investments involve risk, and past performance does not guarantee future results. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions. The author of this newsletter is not liable for any losses or damages arising from the use of the information provided. This newsletter is not intended for distribution to, or use by, any person in any jurisdiction where such distribution or use would be contrary to local law or regulation.
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