3. Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM)
Number of Hedge Fund Holders: 76
Chip giant Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM) ranks 3rd on the list of 12 best semiconductor stocks to invest in right now. Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM) is a semiconductor foundry that produces chips for other chipmakers and consumer electronics manufacturers. The company currently pays an annualized dividend of $1.78 per share and offers a dividend yield of 1.54%.
Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM) stock surged 2.6% on April 1, following the firm’s announcement of a $100 billion-facility expansion in the next three years to increase its global manufacturing capacity. Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM) is on schedule to begin commercial production in its $12 billion fabrication facility in Arizona by 2024. The Taiwanese semiconductor company is also considering establishing manufacturing facilities in Germany and Japan. The stock has gained 48% in the past twelve months and shares have increased 6%, year to date.
On July 13, Needham maintained a Buy rating on Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM) and increased the firm’s price target to $138 per share from the previous $135.
The company has a market cap of $598 billion. In the second quarter of 2021, Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM) reported an EPS of $0.93. The company’s second-quarter revenue grew 28% year over year to $13.29 billion, owing to the high demand for high-performance computing (HPC) products and automotive chipsets.
At the end of the first quarter of 2021, 76 hedge funds in the database of Insider Monkey held stakes worth $10.8 billion in Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM), up from 72 in the preceding quarter worth $11.8 billion.
In its Q1 2021 investor letter, Wedgewood Partners mentioned Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM) and shared their insights on the company. Here is what the fund said:
“We initiated a new position in Taiwan Semiconductor Manufacturing, the largest contract manufacturer of logic semiconductors in the world. The Company has invested prodigious amounts of capital ($17 billion in 2020 alone and as much as $28 billion this year) over the past several years, at returns that suggest to us a very steep and sustainable competitive advantage. The Company has a very long runway to grow its business at a double-digit rate, driven by several favorable industries and company-specific trends including semiconductor architectural design changes, increasing manufacturing process complexity, and the proliferation of more logic semiconductors in more devices.
With over 50% market share, more than 3X that of its next largest competitor, Samsung, the Company dominates the contract foundry industry for logic semiconductors (source: Trendforce). Taiwan Semi has erected a formidable competitive barrier with its manufacturing capacity, as the Company carries over $150 billion in gross PPE (property, plant, and equipment) on its balance sheet. This would put the Company in the top echelons of invested tangible capital, globally. Further, the Company has committed to a multi-year, $100 billion capital investment program aimed at building out some of the only capacity capable of manufacturing leading-edge, sub 7 nanometers (nm) resolution integrated circuits. While semiconductor cycles are notoriously boom-bust, the Company has already secured enough demand to drive very high utilization rates for this new bleeding-edge capacity much earlier compared to previous capacity rollouts.
There are several reasons for higher sustained utilization this time around. First, integrated circuits have become extremely complex to manufacture. The Company has secured the majority of the precious few extreme ultraviolet (EUV) tools that enable the manufacture at resolutions that are substantially smaller than the wavelength of light. The Company has invested in and works very closely (on-site) with EUV tool makers to develop this technology. As a result, there is less available capacity from competitors as compared to previous cycles. Second, due to this complexity, chip developers are radically changing their
architectural designs, pushing more demand to the likes of Taiwan Semi that would otherwise be kept in-house. For example, one large customer, AMD, has had a lot of success taking CPU market share from Intel by architecting chips that have disaggregated several functions into smaller dies. Intel has recently launched a similar architectural change, but it will require it to utilize the Company’s sub-7nm capabilities, as Intel does not yet have an economic way to produce these nodes, in-house. Third, the overall demand for more computing power continues to grow as applications related to artificial intelligence require this, and the availability of hardware instances via public cloud providers enables individuals to access a couple, a dozen, or even hundreds of processors at once. This is vastly different compared to the user-PC-server dynamic of previous cycles. Last, as has been widely reported, older, “trailing node” foundry capacity has been in short supply. These shortages have little to do with the Company’s leading-edge investments right now, as less than 40% of their revenues are derived from nodes larger than 28nm. However, we expect their current leading edge to eventually become “trailing-node.” As these smaller nodes proliferate over time, we expect fewer chip manufacturers will be capable of generating manufacturing yields that justify the capital investment, driving up the long-term utilization and pricing power of the Company’s installed capacity.
Over the next several years, we expect Taiwan Semi to generate percentages of compounded revenue growth in the mid-teens along with higher margins and returns, driven by their scarce capacity in leading-edge logic manufacturing. Though the stock trades at a slight premium to the market, we think it is much more reasonable compared to where it traded earlier this year. In fact, the stock briefly went through a bear market earlier this year – after which we began purchasing shares. As the market might periodically serve up shares due to cycle-ending fears, we will look to add to our holding as the Company should be able to sustain superior growth and returns longer than previous cycles.”
