Analysts with HSBC (via Barron's) recently upgraded their rating on shares of contract-chip manufacturer TSMC (TSM 4.35%) from neutral to buy. Underlying this upgrade is the idea that the chipmaker's revenues from Apple (AAPL +1.54%) could be set to grow substantially in the coming year, driven by a number of factors.
Let's take a closer look at the details.
100% order allocation for Apple A10; advanced packaging win
The analysts point out that rival Samsung (NASDAQOTH: SSNLF) was allocated the majority of the orders for the A9 processor found inside of this year's iPhone 6s/6s Plus, something that publicly available data confirms. The split order structure with the A9 had previously led the analysts to think that Samsung and TSMC would once again split the orders for the A10, although the balance could shift in TSMC's favor for the A10.
However, it looks like the analysts now expect that TSMC will get 100% of the A10 orders, a fact that has been reported/verified by multiple independent sources following the initial report from Commercial Times. Additionally, the analysts believe that, for the A10, Apple will use TSMC's Integrated Fan-Out Wafer Level Packaging -- commonly referred to as InFO-WLP -- chip packaging, further increasing TSMC's A10 dollar content next year.
What does it all add up to?
The analysts think that, with a combination of the A10 win -- and associated InFO-WLP win -- "residual" A9 chip sales, and Touch ID manufacturing, TSMC's revenue from the iDevice maker could jump from $3.7 billion this year to a whopping $4.6 billion during 2016, a 24% increase.
Additionally, if the analysts' estimates are correct, this could actually help drive a respectable amount of revenue growth year over year. Current analyst consensus calls for TSMC to deliver around $26.24 billion in revenue this year, so the incremental Apple business -- assuming the rest of TSMC's business stays flat -- would be good for more than 3% year-over-year growth.
What's actually pretty interesting here is that, for the coming year, analyst consensus sits at $27.64 billion in full-year revenue. If we assume that analyst consensus bakes in the A10/InFO win -- and given that it's so well-known at this point, I'd be surprised if it weren't factored into most analyst estimates -- then it would seem that most of TSMC's growth next year might come from incremental Apple-related revenue.
So far, so good -- but here's one risk investors should be aware of
Although this is looking a bit further ahead, there is one risk that investors should be aware of. TSMC saw a nice jump in revenues when it won the A8 business completely away from Samsung. However, once it became known that Apple would be dual sourcing the A9 from both TSMC and Samsung, sentiment around TSMC seemed to sour somewhat.
The A10 win is a good one for TSMC, but in order to deliver Apple-related growth from here, TSMC is going to need to win the entirety of follow-on A-series orders going forward.
Given TSMC's execution on 20-nanometer and 16-nanometer on the technology/yield fronts -- though TSMC was a little late in actually ramping the latter to production -- coupled with what looks like aggressive timelines for its 10-nanometer and 7-nanometer nodes, there's a reasonable chance that Apple will choose to stick exclusively with TSMC for those nodes.
The variable here is Samsung and its ability to execute. Last I heard, Samsung's manufacturing yields on the Apple A9 chip were substantially behind TSMC's, and technology development will only get harder from here on out. We'll just have to see how it all plays out.
