Apple's (NASDAQ:AAPL) iPhone is among the world's most popular smartphones. The company shipped more than 231 million iPhones during its fiscal year 2015, and it is on track to ship more than 200 million iPhones in its fiscal year 2016.
This immense scale means that investors are very interested in which companies ultimately win contracts to supply key components into Apple's iPhones -- and rightfully so.
One such component is Apple's internally designed A-series processors that power the iPhone. Although Apple does the heavy lifting to design these chips, the company relies on third-party chip manufacturers to take those designs and bring them to life.
For many generations, Apple relied exclusively on Samsung (NASDAQOTH: SSNLF) to manufacture its processors. However, in 2014, Apple chose to tap Taiwan Semiconductor Manufacturing Company (NYSE:TSM) to build the A8 chip that powered the highly successful iPhone 6 series of phones.
The follow-on A9 processor was dual-sourced from both Samsung and TSMC, with reports suggesting that Samsung had won most of the orders. This year's A10 Fusion processor is believed to be manufactured exclusively by TSMC.
Per DigiTimes, Apple's next-generation processor, which is likely to be called the A11 Fusion, will be manufactured only by TSMC.
TSMC is the logical choice for A11
It doesn't come as a big surprise that Apple is planning to build all the A11 Fusion chips at TSMC. TSMC's own public commentary around its expected market share during the 10-nanometer generation strongly hinted at this.
Nevertheless, having more confirmation is never a bad thing.
To be perfectly blunt, all indications point to TSMC's having a stronger offering with its own 10-nanometer technology than what Samsung will have available at the time.
TSMC's technology should offer better chip area density, which means that Apple can cram more features and functionality into a given chip area than it could on the Samsung technology.
Furthermore, given TSMC's track record here, I would expect its 10-nanometer technology to offer superior performance, ultimately allowing Apple to deliver the same performance at lower power or more performance in the same power envelope as an equivalent, Samsung-built part.
And finally, I have more confidence in TSMC's ability to achieve good manufacturing yields (this impacts cost and supply) on its 10-nanometer technology in time for the iPhone 8 ramp than I do in Samsung's.
TSMC's iPhone share should surge in 2017
During the current iPhone cycle, TSMC should have the majority share of Apple's A-series business since it has 100% of the A10 orders and a minority allocation of the A9 orders (some reports have pegged TSMC's share of the A9 at 30%).
However, there's clearly room for TSMC to grow its share since Samsung is likely still supplying a good portion of the A9 chips that currently power the low-cost iPhone SE and the mid-range iPhone 6s-series phones.
If TSMC has won 100% of the A11 orders, then it could achieve 100% share of Apple's application processor orders, since the A10-powered iPhone 7-series phones would become Apple's mid-range offering, and the iPhone SE will probably get an update in 2017, as well.
Additional iPhone applications' processor share would ultimately translate into higher revenues and profits for TSMC -- always a good thing for stockholders.