Executive Summary
Taiwan Semiconductor Manufacturing (TSM) makes money by manufacturing semiconductors for fabless companies like Apple, AMD, and Nvidia. Its economic quality is very high due to the complexity and capital-intensive nature of leading-edge chip manufacturing, creating a substantial barrier to entry. TSM's edge lies in its process technology leadership, manufacturing scale, and long-standing relationships with key clients. Risks include geopolitical tension between Taiwan and China, cyclicality in the semiconductor industry, and the immense capital expenditure required to maintain its technological lead. TSM is the foundry that powers the world's most advanced electronics and its business is tied to the global demand for them.
1. What They Sell and Who Buys
TSM sells semiconductor manufacturing services. Customers include fabless semiconductor companies (Apple, Nvidia, AMD, Qualcomm), integrated device manufacturers (IDMs) that outsource some production (Intel), and system companies designing their own chips (Google, Tesla).
2. How They Make Money
TSM generates revenue by charging customers for wafers based on the complexity of the process node and the volume produced. Advanced nodes (e.g., 3nm, 5nm) command higher prices than mature nodes (e.g., 28nm).
3. Revenue Quality
TSM's revenue quality is high. The company's customer base is diversified across various end markets (smartphones, HPC, automotive). The move to advanced nodes will sustain wafer pricing which is somewhat offset by the cyclical nature of the chip market.
4. Cost Structure
TSM's cost structure is dominated by depreciation (related to expensive manufacturing equipment), materials (silicon wafers, chemicals), and labor (highly skilled engineers). R&D is also a major expense.
5. Capital Intensity
TSM is extremely capital intensive. Semiconductor fabrication plants (fabs) cost billions of dollars to build and equip, requiring constant investment to stay at the leading edge.
6. Growth Drivers
Key growth drivers include: (1) rising demand for advanced chips in smartphones, data centers, and AI applications; (2) increasing outsourcing by IDMs; (3) TSM's ability to maintain its process technology lead.
7. Competitive Edge
TSM's primary competitive advantage is its process technology leadership. TSM has the largest manufacturing scale and customer base allowing them to maintain a leading position.
8. Industry Structure and Position
The semiconductor foundry industry has a few major players. TSM holds a dominant market share, followed by Samsung. Smaller foundries compete in mature nodes.
9. Unit Economics and Key KPIs
Key KPIs include: (1) wafer ASP (average selling price); (2) gross margin; (3) capacity utilization; (4) capital expenditure as a percentage of revenue. Unit economics are strong at leading-edge nodes but decline as nodes mature.
10. Capital Allocation and Balance Sheet
TSM allocates capital primarily to capital expenditures (building new fabs and upgrading existing ones). The company also returns capital to shareholders through dividends and share repurchases. The balance sheet is strong.
11. Risks and Failure Modes
Key risks include: (1) geopolitical risk (Taiwan-China relations); (2) cyclical downturns in the semiconductor industry; (3) technological disruption (inability to maintain process leadership); (4) intense competition from Samsung and potentially Intel in the future.
12. Valuation and Expected Return Profile
TSM's valuation is sensitive to expectations about future growth and geopolitical risk. Fair valuation reflects its dominant market share and technological lead.
13. Catalysts and Time Horizon
Catalysts include: (1) sustained demand for advanced chips, (2) resolution of geopolitical concerns, and (3) ability to continue to invest in technology to produce the most advanced nodes.