Taiwan Semi: On the Cutting Edge

04/12/2017 2:50 am EST

Focus: TECHNOLOGY

Igor Greenwald

Chief Investment Strategist, MLP Profits

You could find any number of plausible reasons not to invest in Taiwan Semiconductor Manufacturing (TSM). Chips are a notoriously cyclical industry, and the current upswing won’t last forever, suggests Igor Greenwald, growth stock expert and editor of Investing Daily's Breakthrough Tech Profits.

Plus, the world’s leading foundry — that is, a contract chip maker catering to “fabless” designers — already controls 56% of this $50 billion market, so how much more dominant can it get?

That would definitely be overthinking it, because the current macro trend is Taiwan Semi’s friend, just as it’s ours. The company is benefiting from booming demand for smartphones in China and elsewhere.

Apple (AAPL) made Taiwan Semi the exclusive supplier of the system-on-the-chip for its newest models. Next month TSM is expected to begin mass production of the chips that will power the upcoming iPhone 8.

These use the cutting-edge 10-nanometer fabrication process to produce circuitry 100 times finer than spider silk. Denser logic lines enable smarter phones that are also less power-hungry.

Taiwan Semi’s lead in the 10-nanometer race is even wider than its overall advantage over the smaller foundry rivals. That’s translated into record and still growing margins.

All this cyclical goodness is currently priced at about eight times EBITDA based on TSM’s enterprise value. Taiwan Semi also pays a dividend currently yielding 2.3% based on last summer’s annual payout.

The semiconductor cycle isn’t going to end next month; it will run out of steam much later than that and with Taiwan Semi’s shares priced significantly higher, I expect.

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