Apple's (AAPL 1.37%) business is suffering as sales of the company's iconic iPhone products fall short of demand, particularly in the Greater China region -- which Apple CEO Tim Cook famously predicted would one day be the company's largest market.
Apple's shortfall didn't just impact Apple; it also had ripple effects across the component supply chain, hitting key suppliers.
One of those key suppliers is Taiwan Semiconductor Manufacturing Company (TSM -0.16%), which expects 2019 to be a slow year and is seeing its gross margin negatively impacted as utilization rates of its newest 7-nanometer chip manufacturing technology -- the very same technology that Apple is using to produce its latest A12 and A12X mobile applications processors -- plummet.
With that in mind, I'd like to make the case that if you want to play a rebound in Apple's iPhone business, betting on TSMC rather than Apple itself might be the way to go. Here's why.
TSMC is primed to win in smartphones
Part of the pain that Apple is feeling is macroeconomic-related -- if the overall economy slows down, fewer folks are going to want to buy Apple's premium-priced smartphones. They may, instead, hold off on buying new phones altogether or go for cheaper options from the competition.
If you're buying Apple stock because you're expecting the company's iPhone business to rebound, you're not just betting that the overall smartphone market will improve -- you're betting that Apple will be able to maintain or expand its market share position.
By contrast, buying TSMC stock allows investors to profit if Apple's iPhone business rebounds, but it by no means completely depends on that. TSMC manufactures chips not just for Apple, but for many other smartphone makers, including Huawei. As you may recall, Huawei saw its sales grow in China as Apple's slumped, thanks to market share gains on the part of the former.
TSMC has exposure to other segments of the smartphone market beyond the premium portion that Apple exclusively plays in. Indeed, the company is the contract manufacturer for chips that go into Apple's premium-priced devices and is even a manufacturer of the lowest-end chips that go into phones that cost as little as $100.
Another thing to consider is that there's an arms race in the smartphone market right now to pack these devices with more features, performance, and capabilities. Many of those capabilities require increases in silicon dollar content, something that ultimately benefits TSMC. Indeed, as Apple and other smartphone makers face increased device cost structures that consumers may or may not be willing to pay extra for, TSMC simply gets paid for that additional content.
A large portion of TSMC's revenue comes from smartphones today, but the company -- as a contract chip manufacturer for a wide variety of clients -- is also well positioned to profit from other, potentially faster-growing areas aside from smartphones.
Want exposure to the Internet of Things? TSMC has you covered, as many of the Internet of Things chip developers will undoubtedly need to tap a third-party chip manufacturer to build their products.
These days, the world of high-performance computing -- which consists of a smorgasbord of products such as CPUs, GPUs, FPGAs (which our own Simon Erickson thinks will be important in the age of AI), and dedicated ASICs -- is an area of great interest and relatively high growth. In fact, TSMC's management has signaled that growth from these high-performance products will outpace that of mobile in the coming years.
TSMC seems like a great way to gain exposure to a broader recovery in smartphones (and, by extension, Apple's iPhone) at lower risk than investing in any individual smartphone maker, like Apple. On top of that, TSMC is well positioned to profit from other growth opportunities thanks to its strong competitive positioning in the world of contract chip manufacturing.
If I had to pick either Apple or TSMC to invest in, my money would be on TSMC.