3 Reasons Why I Still Own Taiwan Semiconductor Mfg. Co. Ltd.

Hint: the Apple deal is only a small part.

Jul 10, 2014 at 8:00PM

When you factor in reinvested distributions, Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) has been a three-bagger during the eight years I've held shares in my portfolio. The S&P 500 is up around 57% during the same period.

TSM Chart

TSM data by YCharts.

Yet, I won't sell. In fact, I expect to once again reinvest the annual distribution when it's paid at the end of the month. And I'll probably do it again next year, and the year following, and on until retirement.

Well, duh!
Not because of Apple (NASDAQ:AAPL), though that relationship is important. The Wall Street Journal cites sources who say the Mac maker could be responsible for as much as 10% of Taiwan Semi's current-year sales. For perspective, analysts are expecting TSMC to generate $23.56 billion in 2014 revenue, a 17.2% year-over-year boost. Apple would be responsible for much of that gain.

Yet, that growth won't come cheap or easily given Apple's history with suppliers. Consider Foxconn, which may as well be an Apple subsidiary. The contract manufacturer has invested in 10,000 robots to build new mobile devices, yet it's Apple that gets first crack at the line. CEO Tim Cook will expect equally big investments from Taiwan Semi.

According to the Journal, TSMC has already sent a large team to Cupertino to better understand Apple's needs while also testing a new 16-nanometer process for making smaller and more power-efficient chips for future iDevices. Watch for large, cash flow-siphoning R&D and capital outlays as these investments begin to take hold.

Why buy?
If the Apple relationship isn't a good enough reason to buy, why should you or I be interested in Taiwan Semiconductor at current prices? I've three reasons for staying invested:

1. The overall market for advanced devices is exploding. More than 1 billion smart devices shipped last year, Gartner says. Yet, that's the tip of the iceberg. Morgan Stanley estimates that, by 2020, we'll see 75 billion devices connected to the Internet, and all of them will need chips. Taiwan Semi, which controls about half of the contract chip manufacturing market, will be responsible for an outsized share.

2. Most device makers don't manufacture their own chips. While I don't have perfect numbers for the the contract chip manufacturing market, most outlets size it at $39.3 billion. In 2010, Gartner put the total at $28.3 billion. Three years of 11.6% annualized growth can't be an anomaly. More companies are looking to vendors to produce the brains of their most advanced devices.

3. TSMC has a long-term track record. Revenue is up 12.4% annually during the past five years. Earnings and cash from operations have improved 12.8% and 9.4% a year, respectively, during the same period. Gross margin has held firm at north of 40%. Intensifying competition from the likes of Intel and Samsung has done nothing to sour this sweet story.

Mix in an annual distribution that yields 1.90% for ADR owners, and I think you've the making for one of the market's best chip stocks right now.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Apple and Taiwan Semiconductor Manufacturing Co. Ltd. (ADR) at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool recommends Apple, Gartner, and Intel. The Motley Fool owns shares of Apple and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers