Taiwan Semiconductor Manufacturing
Free sample research note. Nearly every advanced chip in your life is printed by one company, at a price it increasingly gets to set. Here is how we think about owning it.
Advanced packaging is becoming the binding constraint on AI compute, which hands pricing power to the foundry rather than the designer.
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TSMC is the manufacturing layer under almost everything: phone chips, data centre accelerators, automotive controllers. The important shift of the last few years is that the bottleneck moved from transistor density to advanced packaging. Putting compute and memory together in one package is now harder than making the transistor smaller, and only one company does it at scale.
Pricing power is the whole story
For two decades the foundry business was a service business with brutal capital intensity and little pricing power. That changed when the leading edge narrowed to a single credible supplier. TSMC has been able to raise wafer prices while customers queue for capacity, and gross margins have moved structurally higher.
The concentration risk is real and cannot be diversified away: the overwhelming majority of leading-edge capacity sits on one island. We treat that as a permanent discount on the multiple rather than a reason to avoid the business.
How we would own it
- Build the position slowly; this name gets violently cheap and violently expensive.
- Never let it exceed a tenth of a portfolio, regardless of conviction.
- Add on capex scares that leave the competitive position intact.
What could go wrong
- Geopolitical disruption in the Taiwan Strait.
- Overseas fab construction diluting returns on capital.
- A customer insourcing advanced packaging capacity.
What would change our mind
Gross margin falling below the mid-fifties without an offsetting volume increase, or a second supplier winning production-volume advanced packaging orders.
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