Some giants of the technology industry have the resources and will to build their own vertically integrated businesses that include both semiconductor chip design and production. However, for the vast bulk of chip designers, having Taiwan Semiconductor Manufacturing (TSM 0.23%) available as the go-to foundry for turning their top artificial intelligence chip designs into actual products is a vital part of their business models. For its part, Taiwan Semi has been more than happy to scale up its operations to take advantage of AI demand and demonstrate its continued reliability even during a supply crunch.
Taiwan Semi stock has acted as you might expect, soaring in the wake of strong financial performance. But with shares near record levels, the question on many shareholders' minds is whether the foundry specialist can continue to expand and maintain market share, and how long AI-powered demand is likely to grow at its current breakneck pace. In this third and final article on Taiwan Semi for the Voyager Portfolio, you'll get a closer look at what CEO C.C. Wei and his executive team see as the key strategic points driving the company's future plans.
Image source: Taiwan Semiconductor Manufacturing.
The move toward Foundry 2.0
Wei explained at Taiwan Semi's most recent conference call that the company has essentially seen very different performance from two different sources of demand. On one hand, AI has maintained robust order flow consistently. Yet all other market segments had experienced relatively weak performance and only recently started to bottom out and begin a mild recovery.
Wei expects those trends to continue. With what Taiwan Semi calls Foundry 2.0 -- the production, packaging, testing, and mask-making of all logic wafers -- the tech giant grew at more than double the pace of the broader industry. Even though Wei sees some risks involved from tariff policies, rising prices of components, and other macroeconomic factors, the CEO still thinks Taiwan Semi will be able to grow its revenue at more than double its projection for 14% industry growth in 2026.
What Taiwan Semi is doing to meet demand
At its core, Taiwan Semi aims to be a customer-first business. That means not only considering the needs of its direct clients but also the end-users of the products that those clients make. Consumers, enterprises, and government entities are all ramping up their adoption of artificial intelligence at an accelerating rate. That requires more computer equipment, which in turn means that Taiwan Semi expects that capacity will be the key driver of its success.
To do so, Taiwan Semi has been trying to shorten its timelines toward building out more fabrication facilities, some near its U.S. plant in Arizona and others close to its Taiwan-based fabs. New construction projects in Japan are going forward, and prospects in Europe appear promising. In addition, by seeking to improve productivity at its existing facilities, Taiwan Semi expects to shift its product mix toward more favorable, higher-demand products in the 3-nanometer category.
If it's successful, Taiwan Semi expects that it could see revenue from its AI accelerator chip segment jump at an average annual rate in the mid- to high-50%s through 2029. Yet Wei took great pains to emphasize that growth won't just come from AI. He fully expects Taiwan Semi to see considerable gains in smartphone, internet of things, and automotive chips as well.
NYSE: TSM
Key Data Points
Taiwan Semi and cyclical factors
Amid all this optimism, though, Taiwan Semi still understands the cyclical nature of its business. That's why CFO Wendell Huang has been adamant about noting potential negatives. Margin dilution from overseas fabs could be significant. Capital budgets will expand dramatically to build out capacity. And rising supply costs are threatening longer-term profitability trends. Perhaps most importantly, if anything happens to reverse the AI trend prematurely, Taiwan Semi will be at risk.
Along with the fact that even basic index funds have huge exposure to AI currently, those factors make me believe that Taiwan Semi doesn't need a spot in the Voyager Portfolio. Yet for those investors who don't already have AI stocks in their portfolios, Taiwan Semi's prospects do look favorable, and the company offers a different angle on the semiconductor manufacturing industry than some better-known companies in tech.
