So here’s my quandary. There’s a global shortage of semiconductor chips and yet TSM and Samsung, the two leading foundrys in the world are +5…34% and -17.84% respectively. Samsung, being more than a foundry has other pressures. Intel is not faring much better at +9.31. So what gives?
Interestingly, the Economist ($ paywall) just had a write up about Samsung and talked about the underperformance when compared to other chip makers
The summary is that Samsung’s business is a lot more complex:
- Samsung gets the Chaebol discount. Its business is too complex, with significant exposure to low margin consumer electronics (smartphones) and appliances.
- It’s not traded internationally and is already ~30% of the S.K. stock market!
- And even if you look at the chip making business, you can split that into two: (1) memory (which is a more commoditized, less technology barrier to entry) and (2) foundry (where it’s main consumer is the other Samsung subsidiary, which is in contrast to TSMC who counts Apple, Nvidia, Tesla, etc. as customers).
- The foundry capability is about 2 generations behind that of TSMC (so about 5-6 years behind in the bleeding edge technology node). This lag can persist a decade or more since TSMC is not sitting idle.
- Also, unlike TSMC, who does not compete with any of its competitors, Samsung competes directly with Apple in smartphone (in fact after their litigation battle, Apple shifted more of its chip making business from Samsung to TSMC). So after Samsung gained the necessary technology capabilities and organizational know-how to sell to external partners, it has to broaden our to other non-competing customers (Nvidia, Tesla, etc).
Memory is a great source of cash flow though.
So to change this, and more directly compete with TSMC, Samsung (the foundry) wants to invest $37 billion in CapEx this year. The investment is mostly in leading edge fab:
Which brings me to the original question: “Chip shortage”. Yes, there is a chip shortage, but it is happening on all front of the technology node:
- Not so leading edge (since these are older technology nodes, the competitive set is more diverse: TSMC, ON, NXP, Global Foundry - there are way too many use cases and too many different types of chips, from automotive, webcam, smart doorbell, etc)
- Leading edge (where TSMC, Intel and Samsung are primary foundries - mostly for CPU, PC, servers, AI workloads, and even self-driving cars)
So perhaps the better lens to view the sector is through which use cases - since the foundry players will be determined on which node. Or perhaps, we move upstream in the value chain. All these foundries have to buy equipment from the same providers: the likes of KLA Tencor, LAM, ASML (the only provider of EUV in the world), AMAT, etc.
Note: opinions are my own. Not investment advice.
Thanks Darwin. Was actually expecting a comment from you and am delighted with the depth of your analysis. Yeah, Samsung is much more than a foundry so understandable. TSMC and Intel, a little harder to understand.
I came to similar conclusions, and after more research, have invested in ASML after the 19% retracement in it from 9/23 to 10/4 2021.
Thank you for sharing your insights.
I would bet on Nvidia
And on the reliable Taiwan Semi
Nvidia is my main holding in the US, but thanks for the tip. TSM is really underperforming. Have bought and sold it a couple of times.
consider AVGO (Broadcom) which is fabless.
Also AMD (which has presence in CPU market as well as GPU market -a rare combination). Intel is technologically behind in nanometer sizes and NVDA has only GPU.
Thanks for sharing your insights. Had AMD earlier this year, but sold. Both stocks fall within my selection criteria, however, I’ll let their performance speak for itself. All else being comparable, performance is the final variable.
check this latest forecast, AMD expected to be at top in Sales growth
Here’s a semiconductor stock - Micron Technologies with a brief analysis, all the semiconductor peeps should have a look!
To highlight, TSM is the world’s largest contract chipmaker - a major supplier of Apple and Qualcomm. The 4Q revenue jumped by 24.1% to $75.74B. The highlight for the release was:
The operating margin in the 4Q was 37.9%. After soaring high, the market cap reached $611B. EPS was $1.15, which beat the estimates of $0.04. Overall it exceeded market expectations and slightly missed revenue estimates.
It signalled that the chip shortage could continue in 2022. The factor attributed is delivery time that is 25.8 weeks compared to 6 days in December. This could lead to price hikes during the next 6-12 months.
Here is the revenue from Technology, 5nm and 7nm chips represent half of the total revenue. The percentage of income increased and is expected to increase as the demand for advanced chips is getting extremely strong.
For the upcoming quarter, TSM expects revenues to be between $16.6-17.2B. It also increased its medium-term targets hoping to grow annual revenues between 15-20%. The demand for IoT, industrial applications and the automotive sector are expected to drive growth.
TSMC’s announcement of more significant expenditure in 2022 indicates that demand is likely to continue robust for many years.
Given that TSMC’s revenues are forecast to be over $70 billion in 2022, capital intensity (Capex/revenues) is expected to rise to 57-63 percent this year, a substantially higher level than in prior years (its average ratio was 36 percent from 2016-2020).
The significant investments made by TSMC have a detrimental impact on free cash flow, which was only $5 billion in 2021 and is expected to be negative this year. Free cash flow is predicted to increase as expenditure declines steadily. Still, given TSMC’s massive scale (measured by its enterprise value of roughly $600 billion), its free cash flow yield is expected to stay low for the next three to four years.
To conclude, TSM is doing reasonably well, and with the trends posing towards its growth, it should be the one on your watchlist!
Credits: TSM, Barron’s & Seeking Alpha
Morris Chang established a culture that allowed TSM to crush the competition; it’s just not the money; apart from boasting a very high growth rate, it also has a very high-profit margin due to its efficiency and a considerable scale over which it distributes its cost from research to capital expenditures. It continuously keeps on pushing its boundaries. In doing so, TSM has attained a size and velocity of innovation that is continually expanding its lead, drawing orders, funding, and cutting-edge technologies at an unrivalled rate. This has resulted in a virtuous circle of recruiting top personnel, equipment, technologies, and clients.