Taiwan Semiconductor Manufacturing Co: Stock of the Week

Key Takeaways on TSMC

- TSMC is a supplier to Apple, and has seen buzz following the launch of the new iPhone.

- Suppliers’ profit margins face pressure as Apple seeks to minimize input costs

- The gaming feature of the new iPhone should be a positive for TSMC

- Our fair value estimate for TSMC stock remains unchanged.

Kate Lin: The iPhone 15’s debut, the IPO of Arm Holdings, and the complex realm of geopolitics all intersect through this week’s Stock of the Week – TSMC (TSM, 2330).

TSMC and Apple: A Symbiotic Relationship

TSMC, a supplier to Apple (AAPL), faces pressure from Apple to lower prices, but our analysts remain positive about TSMC's manufacturing capabilities, which continue to underpin our Wide economic moat rating for the semiconductor chip maker. Additionally, Apple’s new smartphone features its support of blockbuster games, which may solidify TSMC’s already dominant presence in the chip space.

TSMC is an Investor in ARM Holdings

As the world’s largest contract chipmaker, TSMC is also an investor in Arm Holdings (ARM), the chip designer that recently completed its IPO. While the immediate and direct impact on TSMC may be limited, the investment could yield equity returns.

Geopolitics Cannot be Left Out of Any TSMC Decision

Huawei’s roll-out of 5G chips has gotten on the nerves of the U.S. government. Export ban waivers granted to chipmakers from Taiwan and South Korea are seen as undermining the effort of the U.S. to cut China’s access to the advanced chips. Furthermore, China’s Ministry of Foreign Affairs has raised security concerns about Apple’s phones, potentially broadening a ban on their use by civil servants to a wider group. This could reduce iPhone sales volume and indirectly hurt TSMC.

Our analyst Phelix Lee thinks investors are shifting away from inventory corrections and a weak macroeconomic environment, focusing instead on the rebound in consumer electronics and the potential market for AI. While estimates are unchanged for these developments, TSMC is an undervalued stock, trading in a 5-star price range.

For Morningstar, I am Kate Lin.

 TSMC Bulls Say

- TSMC should consistently earn higher gross margins than competitors thanks to its economies of scale and premium pricing justified by cutting-edge process technologies.

- TSMC wins when customers compete to offer the most advanced processing systems using the latest process technologies.

- TSMC will benefit from more semiconductor firms embracing the fabless business model and internet giants designing their own data centre chips.

 TSMC Bears Say

- Although TSMC is the foundry leader, each generation of process technology matures and commoditizes quickly, forcing the company to deal with pricing pressure.

- TSMC's new approach to diversify production geographically may add cost pressures with little added resilience to stability.

- Samsung and Intel are committed to heavy capital spending under the support of the U.S. government. SMIC and other state-supported Chinese foundries also lurk as potential threats.