Taiwan Semiconductor Manufacturing Company (TSM) A Bull Case Thesis

We saw a bull thesis on Taiwan Semiconductor Manufacturing Company (TSM) on ValueInvestorsClub by Lohengrin. VIC is our preferred site because the ideas there are generally posted by aspiring analysts who tend to think out of the box. We find the ideas presented on the site well thought out and worth a serious consideration. Click here for the full article. Below we summarized the TSM bull thesis.

Introduction

Established in 1987, TSM is a Taiwanese multinational semiconductor contract manufacturing and design company. It owns and operates semiconductor fabrication plants that turn raw silicon wafers into chips. The company pioneered the pure-play foundry business model by dedicating itself to manufacturing customers’ products. Its decision not to design, manufacture or market any semiconductor product under its own name, has made TSM a “no threat” partner to its large and diverse global customer base. TSM covers a wide range of applications in the computer, communication, consumer, industrial and many standard segments such as high performance computing, automotive electronics, mobile devices and Internet of Things.

Current situation

Some of TSM’s blue chip customers including Apple, Advanced Micro Devices, Nvidia, Texas Instruments and Xilinx design their chips, but outsource their manufacturing to TSM. Marquees global customers have made TSM a rather very strong name with a unique position among the global foundry market peers.

Opportunity

The analyst believes IoT and other technology-based solutions are still at a nascent stage, and the potential for their exponential growth in our lives and economy is huge. Futuristic applications such as advanced facial recognition, automated medical diagnoses etc. will need the all-important powerful semiconductors across all levels of data chain. TSM is the sole winner in the category of having the capability to consistently deliver advanced chips on a reliable time table. Unlike Intel that lost top spot in the industry due to mismanagement to AMD, TSM is in a much stronger position to defend their lead in the peer group. Its expanding cutting edge technology is expected to serve as a moat in keeping its leadership at the upcoming 5nm and 3nm nodes.

TSM has high operating leverage and strong pricing power. With a solid diversification in its clientele, TSM can smoothen any volatility in demand, and thus maintain higher levels of capacity utilization and profitability than its competitors.

Conclusion

TSM has a solid capex plan in place, which generates above average top line and cash flow growth. TSM is capable of growing its earnings in mid-to-high teens. A dip towards 20x 2022 EPS could be a very attractive buying opportunity for long term. The analyst expects a 30% upside in TSM ADRs.

The two main risks to the bullish scenario are any unexpected operating slack and ever-lasting threat of aggression from the mainland China.