Should You Buy TSMC Today?

TSMC's deal with Apple is not the only factor working in its favor

Subhadeep Ghose
Subhadeep Ghose
Jul 15, 2014 at 9:00PM
Technology and Telecom

Taiwan Semiconductor Manufacturing (NYSE:TSM) or TSMC became the first contract chip maker in the industry to launch operations at its 20-nanometer production capacity in the beginning of this year. And the company has already started to reap the benefits from its newest manufacturing line as it started to supply the first batch of A8 microprocessors for the next generation of Apple's (NASDAQ:AAPL) iconic iPhones as part of a 3-year deal between them.

While the move has effectively ended Samsung's monopoly as the sole chip supplier for the iPhone ever since its launch in 2007, TSMC looks set to deepen its ties with Apple even further as the two companies agree to collaborate on an even more sophisticated 16-nanometer microprocessor technology next year .

But then, chip manufacturing is a highly competitive and capital-intensive industry and TSMC would need to do a lot more than bagging the Apple business to stay a notch ahead of rivals such as Intel (NASDAQ:INTC) and Samsung. Let's take a closer look as to how the company plans to sustain its profitability in the near future.

Thinking big
TSMC is already in the process of implementing its plans to invest a whopping $27 billion spread over a 3-year period toward technology upgrades and capacity expansion at its facilities. In fact, it is expected to spend somewhere around $10 billion as a part of its capital expenditures in this year alone.

A majority of these investments are targeted toward achieving even more advanced and sophisticated chip manufacturing capacities, including 10-nanometer production lines designed to achieve greater economies of scale and higher profit margins. With orders from Apple expected to contribute around 10% of TSMC's overall revenues in this year alone, the former's addition to its already substantial customer portfolio is likely to be a big help in funding these mega investment plans.

The roadblocks, if any
TSMC's current expansion plans are very much necessary to keep a check on competitors such as Intel that are also in the fray to acquire a part of the lucrative Apple business. With Intel having recently roped in a major customer in the form of Panasonic Corp. for its already functional and highly advanced 14-nanometer chip manufacturing line, TSMC knows that it simply cannot afford to ignore the former's financial muscle and production capabilities that enable it to emerge as a formidable competitor.

However, TSMC's other major rival Samsung Electronics is definitely having a tough time at present. The South Korean company's chip making business has already been affected by poor sales of its current lineup of smartphones during the recent second quarter, when operating earnings fell by as much as 27% on a YoY basis. On the other hand, the fact that Apple and Samsung have been engaged in a series of patent infringement battles in regions spread out all across the world is also something that may have worked in TSMC's favor while securing the current order.

A load of opportunities
At the same time, Apple's highly probable entry into the wearable devices category is also likely to translate into increased demand for more advanced chips, leading to consistently brightening prospects for suppliers like TSMC. Besides, with the high-end smartphone segment witnessing a steady slowdown in sales in the developed markets of the world, a lot of chip manufacturing companies like Qualcomm (NASDAQ:QCOM) are increasingly focusing on emerging markets like China that have witnessed a surge in smartphone sales in recent years.

One of TSMC's biggest customers, Qualcomm is currently focusing on designing a range of low-end, customized chips for handsets that are purchased by cost-conscious customers in China. Coupled with the rapid expansion of the 4G LTE network infrastructure in that region, this is likely to lead to an enhanced demand for chips and an even healthier scenario for TSMC's order books in future.

Foolish final thoughts
The surge in investor confidence is palpable as TSMC's stock prices have gone up by more than 30% since the beginning of this year. And let's not forget that we're talking about a company here that's still the world's largest contract chip maker with a 50% share of the global market that's worth a staggering approximately $38.9 billion. Incidentally, the Apple deal should enable the company to significantly enhance its current market share.

TSMC is expected to surpass analyst estimates when it declares its earnings for the second quarter on July 16; this is a stock that deserves a place in your tech portfolio.