New addition: Taiwan Semiconductor
Taiwan Semiconductor is one of the most important businesses in the world. It is also one of the most profitable. Of the semiconductor fabrication market, 58% is controlled by this one company. With Intel tripping on their own shoelaces over the last few years, this percentage is likely to increase. The weakness in Taiwan Semiconductor shares over the last year allowed us to take a position in this wonderful business at a reasonable price. Our knowledge of the industry competitive landscape stems from our previous position in Intel. We bought Intel on their promises that they would be able to fix their manufacturing issues within a few months on their more complex chips. They lied and the CEO is no longer the CEO due to this. As we sold out of Intel, we came to the realisation that Taiwan Semiconductor was streaking ahead in their technological advancements, and it was going to be very difficult for Intel to catch up. The issue was that Taiwan Semiconductor shares were at the time moderately expensive. Over a year later with the sharestrading lower than this period, yet the earnings growing consistently, we were able to make our move.
The rich history of their dominance over decades of manufacturing centres around a Taiwanese government led initiative to find an area of manufacturing that they could excel at. Their early decision to manufacture the chips for other companies without branding any of their own chips led to a level of trust from companies knowing they wouldn’t be competing with their manufacturer. Apple is now 25% of Taiwan Semiconductors business due to this fact, as they severed ties with Samsung to manufacture their chips in 2017.
Another feature and competitive advantage of Taiwan Semiconductor is their continued improvement in chip manufacturing. They treat advancements in technology in the same way I play my golf; lots of little advancements toward the hole. Intel has effectively been playing the big swing technique by trying to leapfrog their manufacturing expertise in large jumps. Their recent missed swings sent them across two fairways, and they are now chronically behind.
Samsung is now their major competitor for the more complex chip designs, however due to economies of scale and superior research and development we expect that Taiwan Semiconductor will very likely maintain and more than likely extend their lead over the coming years. Significant government investment by the US and Europe due to the chronic chip shortage may lead to more competition in the easier to manufacture chips needed for autos, however the more complex chips are likely to remain in the domain of only Samsung and Taiwan Semiconductor for at least the next 5 years and potentially far longer if Intel is unable to catch up.
Whilst Taiwan Semiconductor has only grown revenues by 11% a year for the last three years, we are very confident that they are about to accelerate this growth to the high teens and potentially higher as demand for semiconductors increases and they take further market share from Intel. Management has guided the market to margin expansion over time which we think should lead to earnings growth in the high teens or more for several years to come. With growth rates at these levels, the shares are not expensive.