Taiwan Semiconductor: The World's Most Important Chipmaker

Research Notes For 23 to 27 June > https://www.unum.capital/post/r2327june

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Executive Summary

Taiwan Semiconductor Manufacturing Company (TSMC) is the world's largest and most advanced dedicated semiconductor foundry. It manufactures chips designed by other companies, meaning it doesn't compete with its customers (e.g., Apple, Nvidia, AMD). An investment in TSMC is a bet on the continuation of its technological supremacy and the world's ever-increasing demand for advanced computing power, balanced against significant geopolitical risks and the industry's cyclical nature.

The Bull Case: Why Invest in TSMC?

The argument for investing in TSMC rests on four key pillars: market dominance, exposure to secular growth trends, stellar financials, and deep customer integration.

1. Unassailable Market Dominance & Technological Moat

• Market Share: TSMC is the undisputed leader. It controls over 60% of the total semiconductor foundry market. Critically, its share of the most advanced, high-margin nodes (e.g., 5nm and 3nm) is over 90%. This is a near-monopoly on the technology that powers the world's most sophisticated devices.

• Technology Leadership: TSMC is consistently one generation of process technology ahead of its rivals, Samsung and Intel. It is currently ramping up its 3nm node production and is on a clear roadmap to deliver 2nm (N2) technology in 2025. This lead is incredibly difficult to close, as it requires decades of cumulative expertise and massive, sustained capital expenditure.

• Pure-Play Foundry Model: By not designing its own branded chips, TSMC has built immense trust with the world's leading fabless semiconductor companies (Apple, Nvidia, AMD, Qualcomm, MediaTek). These companies are willing to share their most confidential designs with TSMC, knowing TSMC will not become a competitor. This creates extremely high switching costs.

2. Riding Powerful Secular Growth Waves

TSMC is the essential manufacturing partner for the most significant technological shifts of our time.

• Artificial Intelligence (AI): The AI boom is a massive tailwind. Every major AI chip, from Nvidia's H100/B100 GPUs to custom AI accelerators from Google and Amazon, is manufactured by TSMC. Training and running AI models requires an immense amount of cutting-edge computing power, a demand that flows directly to TSMC. Its advanced packaging technology (like CoWoS) is also critical for assembling these complex AI systems and represents another high-margin growth area.

• High-Performance Computing (HPC): Data centers, scientific research, and enterprise computing all demand increasingly powerful and efficient processors. AMD's EPYC server chips and other HPC solutions are made at TSMC.

• Premium Smartphones & 5G: Apple, its largest customer, relies exclusively on TSMC for the A-series and M-series chips in its iPhones, iPads, and Macs. The move to more complex 5G devices requires more advanced and power-efficient silicon.

• Automotive & IoT: While using less advanced nodes today, the trend towards autonomous driving, advanced driver-assistance systems (ADAS), and connected devices represents a long-term, stable growth driver.

3. Exceptional Financial Strength & Profitability

• Pricing Power: Due to its technological monopoly on the leading edge, TSMC commands significant pricing power. Customers are willing to pay a premium for the best performance and power efficiency, which directly translates to high margins.

• High Margins: The company consistently operates with gross margins above 50% and strong operating margins, a testament to its efficiency and pricing power, even with massive capital outlays.

• Strong Balance Sheet & Cash Flow: TSMC maintains a healthy balance sheet with a strong net cash position, allowing it to fund its aggressive expansion plans while returning capital to shareholders.

4. Deep Customer Integration and Ecosystem

• Sticky Relationships: The collaboration between a chip designer and a foundry is incredibly deep and complex, often lasting years. Migrating a complex design like an Nvidia GPU or an Apple A-series chip to a new foundry is prohibitively expensive, time-consuming, and risky.

• The OIP Ecosystem: TSMC’s Open Innovation Platform (OIP) provides its customers with a comprehensive ecosystem of design tools, intellectual property, and support, further embedding them into TSMC's world and raising switching costs.

The Bear Case: Risks & Challenges

The risks associated with TSMC are significant and cannot be understated. They are concentrated in geopolitics, industry dynamics, and valuation.

1. Geopolitical Risk: The Elephant in the Room

• Taiwan-China Tensions: This is the single greatest risk. TSMC's most advanced manufacturing facilities are located in Taiwan, which China claims as its own territory. Any military conflict, blockade, or invasion would be catastrophic for the company and the global technology supply chain. Warren Buffett famously sold his entire stake in TSMC, citing this geopolitical tension as the primary reason.

• US-China "Chip War": TSMC is caught in the middle of the strategic competition between the US and China. US regulations have forced it to stop supplying advanced chips to Chinese companies like Huawei. This tightrope walk could become more difficult, potentially impacting its access to markets or technology.

• Geographic Concentration: Despite efforts to diversify, the overwhelming majority of its production, especially on the leading edge, is concentrated in Taiwan, making it vulnerable to natural disasters (earthquakes, droughts) in addition to political risks.

2. High Capital Intensity & Industry Cyclicality

• Massive Capital Expenditures (CapEx): Maintaining a technological lead requires staggering investment. TSMC's annual CapEx is often in the range of $30-$40 billion. While necessary, this high spending can pressure free cash flow and carries the risk of overbuilding if future demand doesn't meet projections.

• Semiconductor Cycles: The semiconductor industry is historically cyclical. It experiences periods of boom (shortages, high prices) and bust (oversupply, inventory correction, falling prices). While secular trends may dampen this, the risk of a downturn remains, which would impact TSMC's revenue and profitability.

3. Resurgent Competition

• Intel: With its IDM 2.0 strategy, Intel is investing heavily to build out its own foundry services and aims to reclaim process technology leadership by 2025. Backed by substantial government support from the US CHIPS Act, Intel is a serious long-term threat.

• Samsung: Samsung is TSMC's closest competitor in terms of technology. It is also investing aggressively to win over major customers and close the technology gap. While it has struggled with yields in the past, it remains a formidable competitor.

4. Valuation & Margin Pressure

• High Expectations: As of mid-2025, much of the optimism around AI has been priced into the stock, pushing its valuation to historical highs. If growth were to slow or margins were to compress, the stock could be vulnerable to a significant correction.

• Global Expansion Costs: Building and operating fabs in the US (Arizona) and Japan is significantly more expensive than in Taiwan. While this diversification is necessary to mitigate geopolitical risk, it will likely exert downward pressure on the company's legendary gross margins.

TSM Daily Chart: Multi-Month Consolidation + Re-Emerging Bull Trend

Conclusion & Investment Thesis

An investment in TSMC is a high-conviction bet on the "picks and shovels" of the digital revolution. You are buying the world's most critical technology infrastructure company, which is indispensable to nearly every major technology leader.

• The Bull Thesis: You believe that the secular growth trends in AI, HPC, and 5G will continue to drive immense demand for leading-edge semiconductors, that TSMC will maintain its technological lead over Intel and Samsung, and that it can successfully navigate the complex geopolitical landscape.

• The Bear Thesis: You are concerned that the profound geopolitical risk of a conflict over Taiwan is un-investable, that competition from a resurgent, government-backed Intel could erode margins, or that the semiconductor industry is heading for a cyclical downturn.

Ultimately, an investor must weigh the company's unparalleled competitive advantages and growth prospects against the very real and significant geopolitical threat.

Analyst Disclosure: The commentary in this report was produced using an A.I Tool.

Lester Davids

Senior Investment Analyst: Unum Capital