5. Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)
Number of Hedge Fund Holders In Q3 2024: 158
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is the world’s largest and leading contract chip manufacturer. The firm enjoys a wide moat in its industry courtesy of its leading-edge technologies such as 3-nanometer and next-generation technologies such as 2-nanometer. While a competitive moat isn’t a surefire guarantor of industry dominance, Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) benefits from the fact that setting up chip manufacturing plants requires billions of dollars in investment and decades of expertise. Consequently, it is the only firm capable of providing high-yield chips to big-ticket AI players such as NVIDIA. Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) has also grown in importance in the chip industry due to US chip giant Intel’s troubles with manufacturing since it is the only one of two companies in the world that are capable of manufacturing advanced chips with a foundry business model.
Baron Funds mentioned Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in its Q3 2024 investor letter. Here is what the fund said:
“We established a small position in Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM). Morris Chang founded TSMC in 1987, as the world’s first dedicated semiconductor foundry. Until then, semiconductor chips were always designed and manufactured by the same company. TSMC introduced a groundbreaking new business model, in which it acted purely as a contract manufacturer, which proved to be highly successful. TSMC maintained a focus on improving its manufacturing process technology and enabled the emergence of innovative fabless design companies, including NVIDIA, Apple, and Qualcomm, who became TSMC’s key customers. Today, TSMC has a more than 60% share of the total semiconductor foundry market and over 90% share in leading-edge manufacturing. TSMC enjoys high barriers to entry given the ever-increasing cost and technological complexity of semiconductor manufacturing while benefiting from economies of scope as once leading-edge manufacturing becomes lagging edge on fully depreciated equipment. TSMC also benefits from scale– higher profits lead to higher R&D and capex investments, allowing for further technological differentiation, resulting in more profits. We believe TSMC will sustain strong double-digit earnings growth for years to come, driven by continued market share gains, strong pricing power, and structural growth in AI demand. According to C.C. Wei, TSMC’s CEO, “almost all the AI innovators are working with TSMC to address the insatiable AI-related demand.”6 Management forecasts that revenue from server AI chips, such as GPUs and other AI accelerators, will grow at a 50% CAGR from 2022 to 2028 and account for more than 20% of TSMC’s revenue by 2028. We except further long-term upside from the eventual proliferation of edge AI devices, including AI smartphones and AI PCs, which will require significantly more computing power and drive even stronger demand for TSMC’s leading-edge technology.”
