When it comes to semiconductor investing, attention falls mostly to companies that are vertically integrated (think Intel and Texas Instruments) -- those companies that design and manufacture their chips in-house -- or "fabless" firms like Qualcomm and NVIDIA that design chips but farm out the manufacturing process. Far less attention goes to those companies that are a pure-play on the semiconductor manufacturing itself.
But that would be a mistake. The world's largest chip foundry pure-play, Taiwan Semiconductor Manufacturing Co. (TSM 2.84%), continues to grow at a slow and steady clip, all the while doling out a dividend (currently yielding 3.2%). Coronavirus lockdown or not, between progressively smaller chip designs, advancing computing power, and generally increasing use of semiconductors overall, this is an income portfolio staple stock.
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The chip foundry powerhouse of the world
During the first quarter of 2020, TSMC said total revenue was roughly broken down as follows:
- 49% smartphone chips
- 30% high-performance computing (HPC)
- 9% Internet of Things (IoT)
- 5% consumer electronics
- 4% automotive
Smartphone chip sales decreased 8% year over year as the industry matures and consumers upgrade their devices less often, offset by the measured rollout of 5G mobile networks.
HPC, IoT, and consumer electronics shined during the period, though. HPC grew 3%, IoT grew 8%, and the small electronics segment grew 44%. As to the latter, a dual tailwind drove demand higher for digital devices while households shelter in place, and new video game consoles set to be released later this year also boosted the segment.
Overall, revenue and earnings per share increased by 42% and 91% year over year, respectively, lapping the industry cyclical sales downturn hastened by the U.S.-China trade war in 2019. Earnings increased far faster as 5nm node chip production (the smallest and most advanced chip designs available at the moment) moved out of the research and development phase and began to contribute to sales. And that's in part why TSMC is an intriguing stock. Besides benefiting from higher chip use overall as the world goes digital, the company is a leader in manufacturing technology -- giving it access not just to commoditized production, but the most advanced hardware underpinning the most important technological advances.
Whether its 5G network connection-enabling chips, graphics processing units powering data centers and edge networks, or Alphabet's Google tensor processing unit designs enabling AI, Taiwan Semiconductor has a hand in the production process.
Strong cash flow and solid balance sheet
However, TSMC is a more measured investment yielding exposure to high tech. Revenue is up "only" 25% over the last five years, but that's nonetheless a respectable amount considering that the foundry carries a market cap of $276 billion as of this writing. Add in the dividend yield, and this is a solid place to park some cash.
But manufacturing prowess is only part of the equation. TSMC has done an exceptional job managing its balance sheet and getting superior returns on its capital investments (money spent on operational upgrades and other growth initiatives). Ample cash and little in the way of debt means this chip fabricator will be able to withstand any COVID-19 disruption that crops up, invest in manufacturing innovation, and keep paying that dividend.
Data by YCharts.
Put simply, pandemic or not, Taiwan Semiconductor is a solid play on tech with a well-funded cash payout to sweeten the deal. For investors looking to sidestep some of the wilder swings inherent in semiconductor stocks, TSMC is worth a look.
