Taiwan Semiconductor Manufacturing Company (TSM 0.15%) is one of the world's most talked-about chipmakers. The global chip shortage highlighted the contract chipmaker's role as a linchpin of the semiconductor market, making it a flashpoint for trade tensions between the United States and China. Let's see why everyone has been talking about TSMC -- and what all that buzz means for investors.
TSMC's role in the global chip shortage
TSMC manufactures the world's smallest and most advanced chips for "fabless" chipmakers like Apple (AAPL -0.80%), Advanced Micro Devices, and Qualcomm. It established that technological lead with more than three decades of research and development, and its early adoption of ASML's EUV (extreme ultraviolet) lithography systems enabled it to pull ahead of Samsung and Intel (INTC -0.82%) in the "process race" to create smaller and more advanced chips in recent years.
The global chip shortage started approximately three years ago, as a series of trade conflicts between the U.S., China, Japan, and South Korea disrupted semiconductor supply chains worldwide. Those disruptions worsened throughout the pandemic, while demand for new chips skyrocketed as the 5G, AI, data center, connected vehicle, and consumer electronics markets expanded.
That influx of orders caused TSMC's revenue to rise 25% in 2020, and analysts expect 18% growth this year. TSMC's highest-end 5nm facilities are already running at their full capacity, but most analysts and chipmakers expect the current chip shortage to last through 2023.
That traffic jam reveals how dependent the world is on TSMC, and suggests there's room for other contract chipmakers to upgrade their plants and accept more orders.
TSMC's brewing war with Intel
TSMC, Samsung, and Intel are the world's three most advanced chipmakers. TSMC and Samsung produce smaller chips, as measured in nanometers, than Intel -- but TSMC's chips are denser than Samsung's.
Intel's most advanced chips are larger than TSMC's in terms of nanometers, but they offer similar performance for most computing tasks because they have a comparable transistor density. In other words, Intel's self-produced 10nm chip can offer similar performance as AMD's 7nm chip, which is manufactured by TSMC, but it's larger and thus less power efficient.
Intel's inability to keep pace with TSMC sparked speculation that it would also become a fabless chipmaker like AMD, which outsources all of its manufacturing to TSMC and other foundries. However, Intel recently rejected those ideas by doubling down on the expansion of its own domestic foundries.
In late July, Intel renamed its nodes (the names of which are set by each company, instead of an industry standard) to more accurately reflect comparisons with TSMC's nodes. For example, it renamed its 10nm Super Fin node as its new "Intel 7" node, and its original 7nm node as its new "Intel 4" node.
Based on this revised roadmap, Intel plans to catch up to TSMC and Samsung in the process race by 2024, then reclaim the lead by 2025. It will also expand its third-party foundries, possibly with the help of government subsidies in the U.S. and Europe, to lure fabless chipmakers away from TSMC and Samsung.
It's unclear if Intel can achieve those ambitious goals since TSMC plans to spend up to $100 billion over the next three years to maintain its lead (and the U.S. is actually subsidizing TSMC's new plants in Arizona), but a war is clearly brewing between the two chipmakers.
Price hikes and possible delays
Faced with a seemingly endless stream of orders and rising expenses, it would be logical for TSMC to hike its prices. TSMC canceled most of its customer discounts for 2022 earlier this year, and DigiTimes claims it will hike its prices for orders to be fulfilled in December. Prices for older processes (larger than 16nm) will increase 10%, while prices for newer processes will rise 20%.
DigiTimes claims TSMC's top customer, Apple, will still receive discounts, but its prices will still be raised 3% to 5%. The report claims Apple could pass those costs onto consumers with the iPhone 13.
Several recent rumors also suggest the A16 Bionic chip for Apple's iPhone 14 in 2022 could be manufactured with TSMC's 4nm process, instead of the 3nm process as was previously expected.
If those rumors are true, TSMC's 3nm process -- which was scheduled to start mass production next year -- could be delayed. That might initially sound like a positive development for Intel, but Intel ironically outsourced the production of its upcoming notebook and data center chips to TSMC's 3nm process to resolve its own shortages and give its own foundries more time to expand.
Is TSMC still a good investment?
TSMC's stock has rallied nearly 50% over the past 12 months as it's become a top way to profit from the ongoing chip shortage. However, the stock still looks reasonably valued at 25 times forward earnings, and it will remain the world's most important chipmaker for the foreseeable future.
Investors should be aware of TSMC's risks -- which include hostilities between China and Taiwan, its rising capex, and competition from Intel -- but I believe its strengths still easily outweigh its weaknesses.