Investors have a lot of reasons to worry when it comes to Taiwan Semiconductor Manufacturing (TSM 0.28%), the world's largest semiconductor foundry. After all, it's the biggest supplier to Apple (AAPL 0.55%), which recently lowered its revenue outlook over potential adverse effects from the novel coronavirus. It also has major exposure to Huawei, the Chinese mobile phone maker that is in the crosshairs of a protracted trade war between the U.S. and China. 

Those two facts have weighed on shares of Taiwan Semiconductor and may continue to do so, at least in the near term. Since the start of 2020, TSMC's stock is down 10% as investors digest the impact the coronavirus outbreak will have on businesses across the world. 

Coronavirus in all caps on a red background with a world map.

Image source: Getty Images.

Taiwan Semiconductor is navigating multiple headwinds

The decrease in shares picked up steam after a report emerged that the U.S. could prevent Huawei and other Chinese tech companies from accessing semiconductor technology made by U.S.-based companies. It would result in Taiwan Semiconductor being blocked from shipping chips to Huawei. That would be a major blow to TSMC. It is a big supplier of chips for Huawei's HiSilicon fabless semiconductor unit and relies on U.S. semiconductor equipment to make those chips. If it's forced to curtail orders to its second-biggest customer, revenue will take a hit, potentially prompting a sell-off in shares.

According to Bloomberg News, if Taiwan Semiconductor no longer supplies Huawei, it could see a more than 10% hit to its full-year revenue. For its fourth quarter, the chipmaker's revenue was up 10.6% year over year to $10.39 billion. A lot of that growth was driven by strong demand for high-end smartphones. TSMC expects similar growth in 2020 fueled by the launch of new iPhones, including an expected 5G model.  

Taiwan Semiconductor is also contending with the coronavirus epidemic that's worsening as it spreads across the world. That is impacting its customers including its largest, Apple. The iPhone maker, which had been seeing strong demand for its iPhone 11 in China, was forced to issue a warning for its current fiscal second quarter. Apple said production was ramping up more slowly than expected since the Chinese New Year as workers fell victim to the coronavirus. Plants were forced to remain idle, hurting production. Demand is also slowing as many of Apple's stores in China remain shuttered. The same goes for its partner stores. Reduced hours at the ones that are open are limiting sales.  

Apple's coronavirus problem only the beginning?

Apple is TSMC's largest customer, accounting for close to half of its sales last year. It makes processors for Apple, including the A13 Bionic, which is found in the iPhone 11 and the iPhone 11 Pro models. Thanks to the demand for the iPhone 11, orders from Apple had been growing: In late January Apple upped its orders from TSMC. Most of the demand was coming out of China. According to market research firm Canalys, smartphone sales during the first quarter could fall between 40% and 50% in China because of the coronavirus (officially known as COVID-19).   

When Apple issued its warning, investors reacted negatively but quickly calmed down. The stock fell about 3% but then regained its losses. After all, demand is still there and once the coronavirus is contained, it's business as usual.

But that was last week. Since then, the news about the coronavirus has gotten a lot worse, sending global markets tumbling. In South Korea, there were 231 new cases over the weekend, raising the total to 833. In China, a total of 77,345 cases of coronavirus have been recorded. In Iran and Italy, the number of people with coronavirus is sharply rising. 

If the optimists win out and coronavirus is quickly contained, TSMC should come out of this relatively unscathed. Sales may be pushed out to the next quarter, but it's an issue of supply, not demand.

If, on the other hand, the disease becomes a pandemic, impacting economies across the globe, the pain may be more pronounced for Apple and thus TSMC. Add the fallout from moves by the White House to limit U.S. chip technology going to Chinese companies and there's a lot more risk for shares of TSMC.