All it takes is a simple look around to see how much of the world is becoming more digital by the day. From smartphones to electric vehicles to smart home devices and countless other products, there has been a technology-fueled transformation over the past decade or two.
An underrated but vital part of this digital revolution has been semiconductor chips. Semiconductors are crucial components that enable modern electronics. Unfortunately, COVID-19 and the lingering supply chain effects that came with it have caused a shortage of semiconductors in the past few years.
Despite this, one company offers investors a compelling long-term opportunity. Taiwan Semiconductor Manufacturing (TSM 1.26%), or TSMC, is the world's leading semiconductor foundry, specializing in making personalized advanced chips for some of the top companies in the world.
TSMC is a pioneer in a bustling field
TSMC's foundry model was an important development in the tech field. Instead of making semiconductors for general sale, TSMC creates semiconductors specific to its customer's needs. Companies can't go to a retailer to buy TSMC's semiconductors, but they can contract the company and essentially say, "We need a semiconductor for this purpose," and in most cases TSMC makes it happen.
Apple uses TSMC for its iPhones, Tesla for its electric vehicle systems, and Nvidia for its GPUs, and dozens of other companies use them for our daily technologies.
Since TSMC has begun perfecting the foundry model, other semiconductor companies like Intel have begun taking the same approach, although not as advanced in quality and performance.
Investors should be comfortable with TSMC's cyclical business
The semiconductor business is cyclical; all it takes is looking at TSMC's revenue from the past couple of years to see that. Since TSMC is a Taiwan-based company, it reports earnings in both New Taiwan dollars (NT) and U.S. dollars (USD). In the fourth quarter of 2023, revenue was essentially flat in NT and down around 1.5% in U.S. dollars from a year ago.
TSM Revenue (Quarterly YoY Growth) data by YCharts
The lack of revenue growth from TSMC recently can largely be attributed to a broader drop in smartphone sales, which accounted for 43% of its revenue in the latest quarter and 38% of its 2023 revenue. However, that's a short-term problem; investors shouldn't give it too much weight.
According to the International Data Corporation mobile phone tracker, smartphone sales are expected to rise from the negative and grow 2.8% in 2024. That might not seem like much, but with an estimated 1.2 billion in smartphone shipments in 2024, it should have a positive effect for TSMC.
AI will be a nice addition for TSMC
If you've paid attention to anything tech-related in the past year or so, you've encountered the AI frenzy. While TSMC doesn't directly deal with AI, it's a vital part of the AI ecosystem, essentially serving as the foundation. It all begins with the main thing that makes AI possible: data.
The large language models that train and power AI apps (think ChatGPT, Bard, etc.) require tons of data that can't be stored in traditional ways like on external hard drives or cloud storage alone. It's stored and processed in huge data centers that require advanced processing capabilities.
This is why companies like Nvidia have seen such a spike in demand recently. They build graphic processing units (GPUs) that power these data centers. And guess who produces the chips that power these GPUs? You guessed it: TSMC. Without TSMC's semiconductors, the AI pipeline is disrupted. They're not the only company that makes them, but they make the most advanced and efficient ones.
AI-related semiconductors only make up a small portion of TSMC's revenue, but in its latest earnings call, TSMC's CEO said he expects a compounded annual growth rate of 50% for those semiconductors. By 2027, he said he expects AI-related semiconductors to be in the high teens of its revenue.
TSMC's place in the tech ecosystem all but ensures it has longevity in the tech world.
