TSMC: Expect Long-Term Upside From Proliferation Of AI Devices
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Summary:
- Initiated a new position in TSMC, the world’s first dedicated semiconductor foundry, founded in 1987 by Morris Chang.
- TSMC dominates with over 60% market share in semiconductor foundry and 90% in leading-edge manufacturing, driven by superior execution and customer service.
- Expect strong double-digit earnings growth from market share gains, pricing power, and AI demand, with server AI chips forecasted to grow at 50% CAGR.
- Long-term upside anticipated from edge AI devices, requiring more computing power and driving demand for TSMC’s leading-edge technology.
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The following segment was excerpted from this fund letter.
We initiated a new position in Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM). Morris Chang founded TSMC in 1987 as the world’s first dedicated semiconductor foundry. Until then, semiconductor chips were always designed and manufactured by the same company. TSMC introduced a groundbreaking new business model, in which it acted purely as a contract manufacturer, which proved to be highly successful.
TSMC maintained a focus on improving its manufacturing process technology and enabled the emergence of innovative fabless design companies, including Nvidia (NVDA), Apple (AAPL), and Qualcomm (QCOM), who became TSMC’s key customers. While many other foundry competitors emerged over the years, TSMC has outcompeted them with superior execution, operating efficiency, and customer service.
Today, TSMC has a more than 60% share of the total semiconductor foundry market and over 90% share in leading edge semiconductor manufacturing. TSMC enjoys high barriers to entry given the ever-increasing cost and technological complexity of semiconductor manufacturing, while customer relationships are becoming increasingly sticky.
We expect TSMC to continue to benefit from the virtuous cycle of its scale advantage – higher profits leading to higher R&D and capex investments, allowing for further technological differentiation, resulting in more profits. We believe TSMC will sustain strong double-digit earnings growth for years to come, driven by continued market share gains, strong pricing power, and structural growth in AI demand.
According to C.C. Wei, TSMC’s CEO3, “almost all the AI innovators are working with TSMC to address the insatiable AI-related demand for energy-efficient computing.“
Management forecasts that revenue from server AI chips, such as GPUs and other AI accelerators, will grow at a 50% CAGR from 2022 to 2028 and account for over 20% of TSMC’s revenue by 2028. We expect further long-term upside from the eventual proliferation of edge AI devices, including AI smartphones and AI PCs, which will require significantly more computing power and drive even stronger demand for TSMC’s leading-edge technology.
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