It might not be a household brand unlike other more prominent tech companies but Taiwan Semiconductor Manufacturing Company Limited or TSMC is one of the largest and most important companies in the entire global tech sector.
The Taiwanese multinational semiconductor contract manufacturer and designer services most of the leading fabless semiconductor companies in the world while also providing manufacturing outsourcing to manufacturers with fabrication facilities.
It has also been instrumental in advancing further chipmaking while contributing further to the advancements of the consumer electronics industry through its advanced process technology. This article discusses the advantages and disadvantages of TSMC stock.
Chip Ahoy! Exploring the Upsides and Downsides of Investing in TSMC Stock
Pros: Advantages of TSMC Stock
TSMC is traded on Taiwan Stock Exchange and the New York Stock Exchange. This listing to multiple stock exchanges allows it to raise the funding needed to finance its operation and expansion pursuits while demonstrating its attractiveness to global investors. Of course, considering its reputation, there are strong reasons to invest in this company.
It is regarded as one of the largest companies in Taiwan. It is also the largest dedicated and independent or pure-play semiconductor foundry in the world. Adding to this is the fact that it sits on top of other semiconductor companies because it has been considered the most valuable semiconductor company in the world.
TSMC operates a business-to-business model and its pool of business customers is impressive. It provides manufacturing services to leading semiconductor companies including AMD, Apple, ARM, Broadcom, Marvell, MediaTek, Qualcomm, and Nvidia while also handling some of the outsourced production needs of companies such as Intel and Texas Instruments.
Central to the competitive advantage of this chipmaker is its manufacturing capabilities and advanced process technologies that have allowed it to manufacture chips at the highest levels of transistor density, efficiencies in cost, production yields or outputs, and product quality. The following are the specific advantages of TSMC stock:
• Benefits of Large-Cap Investing: TSMC is a large-cap stock with a market cap of more than $400 billion. Investing in large-cap stocks can have several advantages as opposed to investing in mid-cap stocks and small-cap stocks. These include better overall stability, liquidity, business model, management capabilities, corporate governance, financial capabilities, and access to market information.
• Upside of Growth Stock Investing: Another advantage of TSMC stock is that it is also considered a growth stock because its growth prospects remain positive and aligned with technological developments. Investing in this company adheres to the principles of growth investing because it has the potential for generating higher returns or better wealth accumulation within a medium-term to long-term horizon.
• Relative Affordable Stock Price: The stock price of this company remains affordable compared to other tech companies and specific semiconductor companies. Its stock has traded around and even below $20.00 per share from 2021 to 2023. Take note that this is five to eight times cheaper than the historical stock prices of Nvidia Corporation, Qualcomm, and Advanced Micro Devices.
• Key Competitive Advantages: It remains the only semiconductor company in the world that has all three advantages essential to competition and market leadership. These are manufacturing capability, process technologies, and economies of scale. This is the reason why it remains the most important chipmaker in the world and one of the most important tech companies in the entire tech sector.
• Wide and Global Customer Base: Remember that the company services most of the top and relevant tech companies in the world with established brands and even household presence. Purchasing and holding TSMC stock somewhat means investing in the success of its business customers who remain dependent on its superior competitive advantages that remain unmatched by other semiconductor manufacturers.
• Extremely Attractive Financials: Another advantage of investing in TSMC is its strong financials. The company has been generating high margins and has been consistent in maintaining a net cash balance sheet position. It also has a substantial cash flow and has often earned more cash than it spent. These are solid indicators of impressive revenue-generation activities on top of established financial management.
Cons: Disadvantages of TSMC Stock
TSMC is some of the few ideal companies to invest in because of its established and unchallenged market leadership that remains protected by barriers to entry such as structural barriers and capital barriers. Its manufacturing capabilities and leading process technologies have also lowered the bargaining power of its customers.
However, despite its strong market position, it still faces several challenges. It remains affected by disruptions in the global supply chain. Furthermore, because of its business-to-business model that markets to the tech sector, its earnings and profitability are tied to the performance of its customers and the entire tech sector.
The tech sector and the specific consumer electronics industry are also part of the consumer discretionary sector. The performance of companies within these sector and industry are often influenced by the boom and bust phases of the economic cycle. Economic downturns or slowdowns would affect the profitability of these companies.
Nevertheless, as regards the biggest threat to TSMC, geopolitical risk remains an unnerving challenge. The risk of a Chinese invasion of Taiwan or geopolitical conflicts within the South China Sea creates uncertainties about the home-grown operations of Taiwanese companies. The following are the specific disadvantages of TSMC stock:
• Downsides of Cyclical Stock: One of the main disadvantages of investing in TSMC is that it is a cyclical stock. This might be unideal for defensive investors and value investors. Cyclical stocks tend to trade at a valuation discount to defensive stocks. The performance of so-called cyclical companies also often follows the highs and lows or the boom and bust phases of the economic cycle.
• Concerns Over Geopolitical Risks: The geopolitical risk stemming from a possible invasion of mainland China remains a major concern and creates high levels of uncertainty. A full-scale invasion might force it to cease all of its Taiwan operations. It is important to note that TSMC has invested in other locations and has reduced its spending to maintain its predefined war chest level.
• Impact of Competitive Forces: Remember that TSMC remains the dominant chipmaker in the world. However, considering the presence of other chipmakers, especially those with fabrication facilities, competition remains a threat. It can lose its position to a chipmaker or several chipmakers that can offer the same level of production capabilities at a lower cost and faster production turnaround.