Taiwan Semiconductor Manufacturing (TSM +0.12%) is the overwhelming leader in the semiconductor foundry industry, and that's not going to change anytime soon. The company scored a market share of 55.5% in 2022, more than triple that of No. 2 Samsung. The company has undisputed leadership in manufacturing technology, meaning that companies like Apple, Nvidia, and Advanced Micro Devices have no real alternatives.
While TSMC stock is below its pandemic-era high, shares of the semiconductor manufacturing giant still trade well above pre-pandemic levels. The company is worth nearly half a trillion dollars, making it one of the most valuable semiconductor companies in the world. While TSMC's dominant market share and manufacturing edge yield major competitive advantages, the company is facing two headwinds -- one short-term and one long-term -- that could derail the stock.
NYSE: TSM
Key Data Points
A semiconductor downturn
The semiconductor industry was plagued with shortages during the pandemic, but the situation has now reversed. A combination of elevated inventories across multiple industries and weak demand for PCs, smartphones, and other devices is expected to push global semiconductor foundry revenue down 6.5% in 2023, according to IDC.
Global shipments of PCs and tablets are expected to plunge 15.2% this year, while global shipments of smartphones are expected to drop 3.2%. Strong demand for chips used to power AI workloads is offsetting some of this weakness for the foundry industry, but it's not enough to prevent an overall decline.
TSMC reported a year-over-year revenue decline of 10% in the second quarter, which ended June 30. The company remains highly profitable, but profits are dropping much faster than revenue. Gross profit fell 17.5%, operating profit slumped 23%, and net income tumbled 23.3%. Manufacturing semiconductors is a capital-intensive business requiring large quantities of expensive equipment that depreciates over time. When utilization rates sink, the bottom line can deteriorate quickly.
This downturn will eventually end as inventories are worked through, and the ramp-up of TSMC's 3-nanometer manufacturing technology this year should help boost revenue. But in the long run, TSMC's profits could come under further pressure from an increase in competition.
Going after TSMC
Intel (INTC 2.31%) and Samsung are both investing heavily as they try to catch up with TSMC.
While TSMC is likely to remain the market leader for the foreseeable future, its dominance is almost certain to erode in the coming years. Samsung announced in June that it has begun initial production using its own 3-nanometer process, and the company plans to have its 2 nm process ready in 2025 and its 1.4 nm process ready in 2027. Samsung also expects to greatly expand its capacity over the next four years, with clean room capacity expected to be 7.3 times higher in 2027 compared to 2021.
Intel may be an even bigger threat. The company is going all-in on building its own foundry business, spending tens of billions of dollars building new facilities around the world. Intel is attacking TSMC on two fronts. First, the company is rolling out advanced process nodes at a blistering pace. When the company brings its 18A process online in late 2024, the fifth and final node in its current roadmap, Intel expects to reclaim its manufacturing edge.
Second, Intel is going after customers that need mature, low-cost process nodes. The company's Intel 16 process, a revamped version of a mature node that launched in 2018, is now compatible with chip design tools from multiple major providers. TSMC generates nearly half of its revenue from mature nodes, so there's a massive opportunity for Intel to win market share outside of cutting-edge chips.
While Intel's foundry business doesn't generate much revenue right now, multiple companies are likely toying with the idea of using Intel for manufacturing down the road. Nvidia CEO Jensen Huang recently said that the graphics chip company was open to manufacturing with Intel, and AMD CEO Lisa Su said this week that the Intel rival will consider manufacturing partners other than TSMC. Intel has already partnered with Arm to optimize the 18A process for Arm-based chips, so Intel could be an option for smartphone chip companies once that process goes into volume production.
Given the competitive pressure TSMC will be feeling over the next few years coupled with the ongoing semiconductor downturn, it's hard to imagine the company easily getting back to the peak profit margins it enjoyed during the pandemic. If Intel or Samsung can successfully close the manufacturing technology gap, TSMC's status as the only game in town for advanced chips and its incredible pricing power could both disappear.
