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

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!


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3024662, ~/Articles/ArticleHandler.aspx, 10/2/2014 2:25:48 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement