TSMC: Is it Over or Under Valued?
Recently, Taiwan Semiconductors (TSM) has been everywhere. They have helped Apple produce their new M2 Chip, Nvidia produces their Blackwell AI chip, and AMD produces their AMD Ryzen 9 9950X. Each of these chips has found a significant place in society — the M2 Chip powering all of Apple’s new Macbooks, Nvidia’s new Blackwell AI chip foraging quantum computing, or Intel’s new Lunar Lake chip powering millions if not billions of PCs. However, with the world’s over-reliance on the company, many have started to wonder if this company is stable enough to handle the weight of the world. Here, we will dive deep to determine the safety of TSM.
Source: TSMC
Company Overview
Founded in 1987, Taiwan Semiconductors’ sole goal was to manufacture the chips, not design them. To secure its semiconductor fabricators, the company first established a connection with a fabrication company: ASML Holdings. Slowly but surely, the company started to eat into the market share of manufacturing and by 2013 it captured 49% of the world’s semiconductor market. When other companies attempted to enter the market, TSM bought out their business, increasing the barriers to entering the semiconductor manufacturing market. In 2020, the AI market boomed. To pounce on the opportunity to increase their market share and meet the overwhelming demand, Taiwan Semiconductors fast-forwarded their expansion timeline by a year. Now, in 2024, the company holds 62% of the world’s semiconductor market, and ASML owns a monopoly on semiconductor fabricators.
The Company’s Competitors
In 2023, the semiconductor industry was valued at 611.35 billion dollars and had a projected CAGR of 7.64%, allowing the industry to grow to 1.13 trillion dollars. This growth is likely driven by the increased importance and demand that semiconductor manufacturing companies face because of companies like Nvidia, Apple, and HP. Because of this push to AI, TSM has experienced high growth, spearheading the company’s productivity and lucrativeness, allowing it to take a more prominent role on the world stage. Given TSM’s dominance in the market, its competitors have a tall task if they want to take over the industry. Speaking of TSM’s competitors, Taiwan Semiconductors does not face much competition. TSM still holds 60% of the market share, with its main competitors being Micron Technologies and Intel Co. Some believe that with the Semiconductor Manufacturing market growing very rapidly, if TSM does not keep up with its competitors in terms of the number of clients and production quality, it could fall behind. However, TSM controls 90% of the world’s largest semiconductor design companies, requiring a disaster to take place for TSM to fall behind. Additionally, if TSM falls, it would cause a catastrophe in the technology sector as a whole as the company provides the base for this entire sector. Below, I discuss Taiwan Semiconductors’ safeties and threats, giving additional insight into the risk of investment.
Strengths of Taiwan Semiconductors
A name advantage: If you have an oligopoly on the semiconductor industry, it is hard not to be noticed by some of the biggest tech companies in the world. Additionally, because of the advantage of the name, the company can boost the manufacturing prices, knowing that their customers won’t leave because of their brand recognition. Through its brand recognition, Taiwan Semiconductors has a constant revenue flow, proving that its business model is stable and profitable.
The company’s constant influx of orders: Because of Taiwan Semiconductors’ constant influx of orders, they can derive a constant revenue flow and since most of these orders come in annually, it is a predictable pattern that the company can plan for. Because of its predictability and stability, TSM is able to attract investors, further enhancing the company’s prestige and revenue flow.
Boom in the name of technology: Recently, there was a huge boom in the AI industry. As AI has started to grow, the need for GPU and CPU chips has also increased to cope with the operating power needed for complex AI algorithms to run. Taiwan Semiconductors has been the main benefactor of this boom. Because of its pre-existing connections, TSM was able to and still is in control of the manufacturing of each of the biggest tech companies in the world’s chips.
Large Capacities to Mass Produce Chips: Again, Taiwan Semiconductors is the largest company that manufactures chip hardware. Due to its world renown, TSM must have multiple factories producing high-end chips to keep up with market supply. It has just that. With 10 GIGAFAB factories, TSM can produce a variety of chips in each of its 10 facilities, allowing for flexibility in their vital world system. In each of their GIGAFABs TSM produces almost 100,000 chips per month. Additionally, it has 6 MegaFabs which produce around 25,000 chips a month. Lastly, it has 1 MiniFab, producing 10,000 chips a month. Each of their fabs has different levels of flexibility and operating costs — GIGAFABs have the highest flexibility and the lowest operating costs, however, they cost billions of dollars to build. Hence because of its ability to mass produce, TSM proves itself to be a stable and profitable business model.
Diversity in Clients: Because of TSM’s long history, it has been able to work with a wide variety of clients — ranging from the most prestigious to startups. TSM serves 528 customers, allowing TSM to not be over-reliant on one customer. Through this diversity, TSM can maintain a successful, stable, and profitable business model.
Source: Manufacturing Today
Quantifying TSM’s FinanciALS
Taiwan Semiconductors’ 2024 Q3 revenue was $759 billion, representing a 38.95% increase from 2023 Q3’s revenue figures. Additionally, TSM’s gross profit margin in Q3 of 2024 of 54.45% is an 8.16% difference from the sector average of 50.34%. From 2020 to 2023, TSM experienced a total year-over-year (YoY) revenue growth of 61.95%, but from September 2023 to September 2024, TSM saw a higher YoY growth of 71.98%. As the AI industry has experienced a boom in the past year, most chip manufacturing corporations around the world, wanted to increase their ability to produce, but never could because they did not have the clients or the resources. On the other hand, TSM had the cash and clients to increase its production and increase its revenue. Because of the rapid increase in the need for AI and its wide range of resources, I believe that revenue growth is key for TSM to show it can still produce at a high level. In response to the AI boom, TSM acquired land in Arizona, USA to start building a factory to match the demand for AI chips.
Valuating Taiwan Semiconductors’ Business
To evaluate TSM’s business I compared its Market Cap, PE ratio, EPS, and Debt-to-Equity ratio to its top 4 competitors. While TSM is the largest company, it has been in the market for much longer allowing it to have more large and higher paying customers than its competitors. TSM has a lower trailing P/E ratio and a lower D/E ratio than its competitors, allowing it to be more profitable. Furthermore, with a better EPS, shareholders know that TSM translates more profit to its investors than its competitors, making it a more lucrative investment. With its positive ratios, TSM appears to be an undervalued company as its ratios exceed the top 4 competitors by approximately 200%.
Data from Seeking Alpha and Yahoo Finance
Threats and Threat Mitigants to Taiwan Semiconductors
Geographic Location and Geopolitical Tension: Recall that Taiwan Semiconductors is headquartered in Taiwan. Taiwan has constantly been under the watchful eye of China. It is no secret that China is unhappy with Taiwan being recognized as its own state, and in the past China has attempted to annex Taiwan forcefully. Many experts suggest that 2027 is the year that China could attack Taiwan because China has started conducting simulations of attacks against Taiwan. However, some believe that 2049 could be the year that Taiwan becomes overrun by China, not 2027. Disregarding the year, TSM’s future could be bleak. One way to mitigate this glaring risk is for TSM to establish more fabricator locations abroad. This will allow TSM to easily establish a new headquarters if Taiwan is attacked, in turn keeping the technological market afloat.
Over-reliance on only a few customers: According to Investopedia, 17% of Taiwan Semiconductors’ revenue is derived from Apple, and 11% of it is derived from Nvidia. 38% of TSM’s revenue comes from two companies. While none of these companies will likely leave the semiconductor purchasing market, TSM must prepare for the unlikely event that one of them switches semiconductor providers. To mitigate this risk, TSM can produce different products that relate to its semiconductor-making industry such as producing integrated circuits. This will allow TSM to reach a wider audience and will inherently increase the number and quality of consumers.
Under diversification in fabricator locations: Coupled with the geopolitical tension surrounding Taiwan, not mitigating this risk could be fatal to the company. Most of TSM’s fabricator locations are in Taiwan, and with a potential China attack arising, TSM could be in danger. TSM only has 1 8-inch fab outside of Southeast Asia. The rest of their fabs, 19 Fabs, are in that region. TSM’s 8-inch fab is considered the second tier of fabrication plants. TSM has just started to push for more fabricators outside of the region. Specifically, they are making one in Arizona and the US. While TSM has already started mitigating this risk, it must put more cash into making more fabs across the globe to diversify itself. Not doing so would be catastrophic not only to the company but also to the global technological industry.
Conclusion
I believe in Taiwan Semiconductors. TSM has a multitude of customers and can and is growing with the huge AI boom, allowing it to stay at the top. TSM has a large customer base, but I only see its base growing with the importance of AI. I believe that if TSM expands and develops a multitude of overseas fabricator locations, it can truly rule the semiconductor manufacturing business with its evergrowing clients, allowing Taiwan Semiconductors to be a buy candidate.
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