If you look around your house, you'll likely see a smartphone, TV, laptop, tablet (especially if you have young kids), gaming console, or even smart appliances. One thing all those items have in common is that they rely on semiconductors (chips) to function properly.
If you dig deeper into what those chips have in common, they were likely manufactured by Taiwan Semiconductor Manufacturing (TSM 4.54%) (TSMC). TSMC is by far the world's leading chip manufacturer, and that's the reason why I'm loading up on the stock to hold forever.
Image source: Taiwan Semiconductor Manufacturing.
Much of the physical tech world begins with TSMC
TSMC operates on the foundry model. Instead of manufacturing chips for general sale, it manufactures chips on order to meet the specific needs of other companies.
For example, Apple would design the chips it needs for its latest iPhone, Nvidia designs the chips for its GPUs, and Amazon will design chips for its cloud servers. In all those situations, TSMC is often the company that brings these blueprints to physical life.
Manufacturing chips with the precision, reliability, and consistency of TSMC isn't easy for even the most tech-forward companies in the world. It requires tens of billions of dollars in investment, tons of specialized engineers, and world-class plants, which is why companies would rather rely on TSMC to do it than make the investments to build their own (less effective) plants or spend on the engineering talent.
NYSE: TSM
Key Data Points
A monopoly on AI chips
When it comes to manufacturing chips for items like smartphones or computers, TSMC holds a commanding market share. However, when it comes to manufacturing artificial intelligence (AI) chips, TSMC is essentially the only game in town. Its market share is well into the upper-90% range.
As tech companies (especially hyperscalers) commit to spending more on building out their AI infrastructure, TSMC will be a natural beneficiary. It won't supply the systems that fills data centers, but it will undoubtedly supply the chips those machines we built around.
This reliance on TSMC has boded well for its finances in recent years, too. Its high-performance computing (HPC) segment, which includes its AI chips, accounted for 57% of its $33.1 billion in revenue in the third quarter.
Maybe more noteworthy, though, is how TSMC's leadership position has given it pricing power that has strengthened its margins. In the third quarter, its gross margins increased from 57.8% to 59.5%, and its operating margins increased from 47.5% to 50.6%.
TSM Revenue (Quarterly) data by YCharts
Regardless of how beneficial AI chips have been to TSMC's business over the past couple of years, the company is far from dependent on them; they're just a massive plus.
TSMC has a strongstrong foothold inmanufacturing for virtually all major tech companies, which makes it a stock I'm comfortable holding for the long haul.
