Tech-savvy Taiwan has long been the cradle of computer component manufacturers, where the world’s largest dedicated integrated circuit foundry, Taiwan Semiconductor (TSM: Charts, News, Offers), is based. Taiwan Semiconductor is a foundry, unlike full manufacturing companies such as Intel (INTC: Charts, News, Offers), and as such provides a valuable service to fabless customers. Fabless semiconductor companies, such as AMD (AMD: Charts, News, Offers), Nvidia (NVDA: Charts, News, Offers) and Qualcomm (QCOM: Charts, News, Offers) specialize in the design, marketing and sales of semiconductor products while outsourcing the fabrication (fab) process to an overseas foundry.
Overseas foundries throughout Asia are popular with Western fabless manufacturers which take advantage of lower labor costs, which allows the fabless company to save more money for research and development. Over 80% of Taiwan Semiconductor’s customers are “fabless” – thus the company is an invaluable component in the manufacture of modern semiconductors. The company’s current ambition is to outgrow its role as a foundry and evolve into a leading player in the global semiconductor industry.
Daily Chart
The bulls currently favor Taiwan Semiconductor on a technical basis. The stock is currently trading above its 20,50 and 100 day averages, suggesting strength moving forward despite a downturn in the market. The stock hit 4 new highs and increased 1.16% in value over the past month. The company’s revenue is projected to increase by 17.5% to 20% in fiscal 2011 and 11% in fiscal 2012. Although earnings are expected to be flat for fiscal 2011, they are forecast to increase 13.1% in 2012 as well as 15% in the next five years.
In addition to its healthy global exposure, Taiwan’s own domestic semiconductors market is set to overtake Japan in 2011, posting a 36.2% year-over-year increase in 2010. Taiwan’s market increased from $6.87 billion USD in 2009 to $9.11 billion in 2010. In addition, the global market increased 25% last year to $43.55 billion, a record which beat its previous high of $42.67 billion in 2007. In addition, the foundry sector is expected to increase 12% throughout fiscal 2011.
The company also plans to double its output capacity over the next five years in order to meet the strong demands in personal computers, tablet and smartphone devices. Taiwan’s National Chip Implementation Center has also announced a new fabrication method which cuts production time by two-thirds while decreasing costs by half. The Center, which is government funded, has announced an investment partnership with Taiwan Semiconductor, which will be an incredible growth catalyst for the company. CEO Morris Chang has referred to the partnership as a valuable “paradigm shift” for the industry.
For the first quarter, Taiwan Semiconductor posted $36.28 billion (~$1.2 billion USD) in profits, which impressed Morgan Stanley analysts, whom stated that its strong earnings reflected disciplined control of operating expenses and its margins. The brokerage stated, “Our thesis for investors is to take a more cautious stance on the foundry sector overall, but to overweigh TSMC on its significant exposure to smartphones and tablets. The fact is TSMC is outperforming peers, and communications is outpacing other sectors to give us more confidence in the thesis.”
While the company has strong growth prospects as the economy stabilizes and demand for high-tech products resumes, the strengthening Taiwanese dollar – which currently stands near 28 NT dollars to 1 US dollar – stands to hurt its foundry business. The dollar had been typically valued at approximately 32 NT dollars over the past few years. Taiwan’s strong, symbiotic relationship with mainland China – as evidenced by Hon Hai Precision’s subsidiary Foxconn – will also heavily influence the company, for better or for worse. The country’s economy is especially turbulent during election years – such as the upcoming Presidential election in 2012 – when pro-secession and pro-unification parties openly clash and all eyes worldwide are focused on tensions between Taipei and Beijing. However, Taiwan also heavily influences the Chinese semiconductor market, with many Chinese and global upstream materials firms maintaining an active presence in Taiwan, which is regarded as a springboard into the Asia-Pacific market. Shares of TSM currently trade approximately 11.85 times past earnings.
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Taiwan Semiconductor is Poised for Growth
Can TSM keep growing?
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TSM reassures investors that it can hit its forecast targets.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
