The Best Way to Play the iPhone 5 (Hint: It's Not Apple)

Suddenly, Foxconn isn't the best Asian play on the rising popularity of Apple's (Nasdaq: AAPL  ) iPhone. Citing unnamed sources, Reuters says the Mac maker is using Taiwan Semiconductor Manufacturing (NYSE: TSM  ) to develop its A6 mobile processor on a trial basis.

Neither Apple nor Taiwan Semi is up much on the news. I suppose I get that -- this is Google's day, after all. But doesn't TSMC at least merit a closer look? The implications of a potential partnership here are huge, especially now that the iPhone 5 is reportedly just months away.

No one knows precisely why Apple would choose to mix it up with suppliers at such a critical time, but trade magazine EE Times has a theory. Reporter Peter Clarke says relations between Apple and Samsung, its manufacturing partner for the A4 and A5 chips, have cooled ever since the South Korean electronics giant got into the Android device development business.

I can see that. I can also see how sponsoring free copies of the new Galaxy Tab and Chromebook for attendees of Google's I/O developer conference probably didn't help matters.

Not that leaving Samsung would be easy for Apple. The iPhone is a complicated device with a custom-designed chip. There aren't many capable of manufacturing it on a mass scale. Unlike regional peers United Microelectronics (NYSE: UMC  ) and Semiconductor Manufacturing International (NYSE: SMI  ) , TSMC is in that exclusive club.

Still not convinced that Taiwan Semi is the best play on the iPhone 5? Consider these three facts before you answer:

  1. Taiwan Semi trades for a discount to the industry average multiple (11 vs. 14.8).
  2. The stock yields 3.3% in dividends annually.
  3. Founder Morris Chang remains involved, 24 years after starting the company.

Add it all up, and mix in a fat contract from Apple, and there's little doubt in my mind that Taiwan Semiconductor remains Asia's top chip stock. Do you agree? Disagree? Tell us what you think using the comments box below.

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Fool contributorTim Beyers is a member of theMotley Fool Rule Breakers stock-picking team. He owned shares of Apple, Google, and Taiwan Semiconductor at the time of publication. Check out Tim'sportfolio holdings andFoolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insightsdelivered directly to your RSS reader.

The Motley Fool owns shares of Apple and Google.Motley Fool newsletter services have recommended buying shares of Apple and Google and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.


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  • Report this Comment On July 15, 2011, at 8:23 PM, makelvin wrote:

    There is a problem with your assertion regarding TSMC and iPhone5; that is everyone pretty agree than the new iPhone5 will be using A5 chip, not A6. If TSMC is doing trial manufacturing for the next generation A6 chip, it most likely would not be going into the up-coming iPhone5. So even if this whole thing is true, investor will not be seeing their return for at least 6 to 9 months from now. No to mention that there are rumors that Intel might also be interested in manufacturing Apple's next gen chip for them. So TSMC is really not a complete lock-in even if Apple really is trying to get out of Samsung.

  • Report this Comment On July 15, 2011, at 8:33 PM, semismart wrote:

    The dividend is safe, but don't expect a significant increase in share price.

    For the last couple of decades, TSMC has been the undisputed leader in the foundry market, manufacturing the highest volume chips for the hottest markets year after year. The A6 is just the next in a long line of volume products. Kind of business as usual.

    Maintaining leadership costs them dearly in R&D and capital equipment expense. And for every new process generation, this "buy in" increases.

    The result is a perpetually range bound stock.

    Good luck to all!

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