Earlier this year, TSMC (NYSE:TSM) was seemingly stuck in a rut after an escalation of the trade war between the U.S. and China forced it to stop accepting orders from Chinese tech giant Huawei, its second largest customer, which accounted for 14% of its revenues in fiscal 2019. But over the past month, three powerful tailwinds lifted TSMC's stock nearly 50% to an all-time high. Let's review these catalysts to see if that enthusiasm is justified.
1. Intel's 7nm setback
Intel (NASDAQ:INTC), TSMC, and Samsung own the world's most advanced chip foundries. Intel's foundry produces its own chips, while TSMC and Samsung manufacture chips for "fabless" companies, which outsource the production of their chips.
These three foundries are engaged in the "process race" to produce ever-smaller chips measured in nanometers (nms). TSMC currently leads the pack in terms of size and transistor density That's why top fabless chipmakers like AMD (NASDAQ:AMD), NVIDIA, Qualcomm, and Apple (NASDAQ:AAPL) all place their orders with TSMC.
Intel already tripped once while shifting from 14nm to 10nm chips, which caused a shortage of 14nm chips and a multi-year delay of its 10nm chips. It then disappointed investors again in late July by admitting its new 7nm process was "trending approximately twelve months" behind its internal target. That stunning setback thrilled TSMC investors for two reasons.
First, Intel's huge delay leaves the door wide open for AMD, which produces its latest Ryzen and Eypc CPUs with TSMC's 7nm process, to expand its market share in the PC and data-center markets. Second, Intel admitted it would need to outsource the production of its chips to third-party foundries to get back on track.
Shortly afterwards, Taiwan's Commercial Times claimed TSMC had received an order of 180,000 wafers from Intel to produce its upcoming 6nm chips, which nearly matched the 200,000 wafers ordered by AMD. In other words, TSMC stands to profit regardless of what happens between Intel and AMD.
2. New orders from Apple
Apple, which accounted for 23% of TSMC's revenue last year, is traditionally its largest customer. Apple's first 5G iPhones, which will likely launch this September, should boost TSMC's smartphone chip revenues, which accounted for 47% of its top line last quarter. Apple's recent decision to replace Intel's chips in its Macs with its own ARM-based CPUs -- which are expected to be manufactured with TSMC's 5nm process -- should complement that growth.
Another recent report from Taiwan's Economic Daily News claims Apple is setting up a display R&D plant inside TSMC. This deal could reduce Apple's dependence on Samsung, which still produces most of its display panels, despite being its top competitor in the premium smartphone market. Those three catalysts could significantly increase Apple's weight on TSMC's top line over the long term and offset its loss of Huawei's orders.
3. The growing HPC market
TSMC generated 33% of its revenue from the high-performance computing (HPC) market last quarter, up from 32% a year earlier. It's also been TSMC's fastest growing market in recent years.
The HPC market's growth was temporarily throttled by slower spending throughout the COVID-19 crisis, but several long-term secular growth trends -- including artificial intelligence applications, Internet of Things devices, cloud computing, robotics, digital healthcare, and autonomous cars -- should continue boosting global demand for high-end HPC chips.
The global HPC market could still grow at a compound annual growth rate (CAGR) of 6.1% between 2020 and 2025, according to Mordor Intelligence, with orders from AMD, NVIDIA, and possibly even Intel (if it becomes a fabless chipmaker), lifting TSMC's HPC revenues to fresh highs and reducing its dependence on the slower-growth smartphone market.
Does TSMC have even more room to run?
Wall Street expects TSMC's revenue and earnings to rise 28% and 34%, respectively, this year, which are impressive growth rates for a stock which trades at just 25 times forward earnings. TSMC traded at lower valuations earlier this year because investors fretted over the trade war, the sluggish smartphone market, and COVID-19 disruptions of semiconductor supply chains.
However, Taiwan successfully contained the COVID-19 pandemic as TSMC kept its plants running, and the aforementioned catalysts have finally brought back a stampede of bulls. Those factors, along with TSMC's generous forward dividend yield of 3.7%, make it a compelling buy in this volatile market.