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In the video below, Eric Bleeker discusses why Taiwan Semiconductor (NYSE: TSM), a company he singled out as the top chip stock heading into 2012, performed so well last year. A transcript follows the video.
Austin Smith: Eric, I wanted to talk to you and revisit some of the top chip stocks of 2012.
Eric Bleeker: Yeah. At the end of 2011, I had actually suggested that a company, Taiwan Semiconductor, was the top chip stock for 2012.
Well, I'm now looking back and since that call, Taiwan Semi is up about 50%. Why is this happening? It would be easy to dismiss chip manufacturing as just a commoditized business. Doesn't it strike you as a commoditized business?
Austin: It does, although there is some advanced technology there. I mean, it's not a business I would really be excited about owning.
Eric: Exactly. But so many unique trends are playing out, and the innovation at this bleeding edge is leading to huge consolidation within the industry, which is improving gross margins once again, is being able to bring large customers to Taiwan Semi, and the result has been a 50% increase since I made that call, which, for a company of its size, is awesome. It's also a company paying out 3% plus dividends the whole way.
Let's look at it. What's the situation? Well, right now we not only have Taiwan Semi basically executing in a consolidating industry that's pushing out the smaller players because it's so expensive to keep moving up, technology-wise. They're also looking at getting Apple as a customer, who is doing everything they can to get out of Samsung's grasp.
That's driving them from the story, but what's truly amazing is just the raw dynamics. Their big competitor, Samsung, has to produce 500 million of its own phones or mobile devices next year. That doesn't leave a lot of capacity for other players.
GlobalFoundries is a great competitor, too, but they're much smaller. Taiwan Semi, you just have to go through them. They're becoming a toll booth. The one big concern for them is Intel, but there's no guarantees that Intel is even going to enter the manufacturing market.
I think the only troubling issue with Taiwan Semi, and what could hold them up is valuation. They're about 17 P/E, but if we look at the triumvirate of mobile players, where ARM owns the architecture, Qualcomm owns the design, and Taiwan Semi owns the manufacturing, Taiwan Semi is actually the cheapest-trading of that group. [Qualcomm is also a key customer of Taiwan Semiconductor.]
Do I think we'll see another 50% gain in 2013? No. It's just a little too big at this point. Its P/E is probably not going to expand to the level there, but do I think it's a great stalwart in your portfolio? Yeah. It's still a great chip stock to own in the year ahead.
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