Investment Thesis
I believe that the Arizona plant delay is just another short-term noise and Taiwan Semiconductor (NYSE:TSM) is playing the long game quite strategically by further cementing itself as the top player in the industry, by making deals with countries like Germany, which opens up opportunities for further expansion in other countries through the European Chips Act. This in my opinion destroys the negative narrative surrounding the geopolitical risks between Taiwan and China as the company becomes even more important globally.
Stronger Foothold Globally
The company has been quite busy recently with strategic expansions, which will help it cement itself as the leader in the semiconductor industry. TSM is looking to build a chip plant in Germany for $10B, of which 70% of it will be owned by the company, while the remainder will go to Bosch, NXP Semiconductors (NXPI), and Infineon Technologies (OTCQX:IFNNY). The company is taking advantage of the European Chips Act to get a better foothold globally and deepen its relationship across the globe, which will signal to many that the company is here to stay. I believe other European countries may follow suit and decide to start a partnership with TSM through the European Chips Act.
Arizona Plant Delays
So, it’s been a bumpy ride for TSM and the new plants in Arizona. The company announced delays due to not having enough skilled workers in the US to operate the factory, which meant that TSM had to send over highly skilled workers to train the US workers. This means that the plant got delayed by another full year. The news is considered negative; however, it is too myopic in my opinion as in the end, the company will have a stronger foothold internationally once the factories are up and running. In my opinion, this delay is warranted because TSM is a top-level producer of chips, so anything below their standards is not going to fly with their investors and their customers.
I believe that this is an opportune time to keep adding to a leader in the semiconductor industry, but because of such negativity surrounding the company, which includes geopolitical risks of China, and negative sentiment of the industry in general, we may see further declines in its stock price until everything turns around.
Artificial Intelligence
We know that the demand for AI chips and anything related to AI is blowing through the roof right now. TSM is not sitting still here, as I mentioned in my previous article, the company is expanding its capacity for AI in Taiwan, and with the return of the demand for advanced packaging, TSM is moving up the orders to fulfill it. The company is looking to more than double its wafer capacity by the end of the year. Furthermore, there is also the possibility that the company will add advanced packaging capacity to its Arizona plants, however, that is yet to be confirmed by the company. We don’t know what capacity it would be, but I wouldn’t be surprised if it’s close to what the company can produce right now. Even if it’s only half of what it can produce, it is still an addition to the company’s revenues in this fast-growing AI chip segment.
Geopolitics
The above strategic moves the company is making tell me that the geopolitical risks are overplayed and have little merit in my opinion. The company, as I mentioned in another article in more detail, is even more important globally, which should deter China from doing anything drastic. The company continues to solidify its ties all around the world, with the most powerful countries like the US and Germany, and I’m sure it is not going to stop there. Many other countries would gain from TSM’s expertise in the field, which will benefit the company and the countries alike.
As mentioned in the article, China is still too dependent on international companies for semiconductor needs, even with its Made in China 2025 campaign. I do not understand why so many regard the geopolitical risks between the US and China to be such a huge deterrent from investing in what can only be described as THE semiconductor company, that has a huge head start on many companies that try to replicate its success.
Risks
I believe that most of the risks are too near-term focused because, in the long run, the company is a fantastic inclusion to anyone’s portfolio.
If the US and China’s worries go on for much longer, coupled with the negativity in the semiconductor sector, it will likely keep the stock price depressed and we will probably see further deterioration. I would view this as an opportunity to add to the long-term portfolio.
Besides the specific risks above, the macroeconomic outlook is continuing to be shaky, which affects the global stock markets in general.
The Arizona plant may be delayed for even longer, which will bring further negative sentiment to the company.
Quarterly reports for the next couple of quarters may not be very positive, which will bring further downward pressure, however, this has been communicated in the previous reports that the demand for semis is poor right now and that this should turn around sometime in early ’24.
Key Takeaway
All the above initiatives the company is taking further cement its vital role in the semiconductor industry and I do not see how this is going to change any time soon, especially since the company is not standing still and will no doubt continue to build on the relationships with other European countries and the US in the future.
The Arizona plant delay is only considered bad in the short term. In the long term, the highly skilled workforce will deliver fantastic results in the end and will be worth the wait in my opinion. Further expansion of the most demanded product production, the advanced packaging, will turn into substantial revenues for many years to come. All these efforts should dissipate the worries of China as the company becomes too big to brush off, as it had already dissipated those worries for me.
I stand by my Strong Buy rating and will be looking to add some more to my existing position in the coming months as I believe there will be further price declines in the near term while the negativity and pessimism remain in the markets.
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