In the high-stakes world of semiconductor manufacturing, strategic moves often determine who leads and who follows. Taiwan Semiconductor Manufacturing Co. (TSM, Financial) is no stranger to this game of chess.
With a recent boost from extending its exemption from U.S. trade sanctions against China, the company stands on the cusp of a new era. The exemption solidifies Taiwan Semiconductor's operations in its Chinese facilities, focusing on 16-nanometer chips, and signals a pivotal shift in the global tech landscape.
Strategic advantages may propel Taiwan Semiconductor to new heights
To begin with, Taiwan Semiconductor has received an extension of its exemption from U.S. trade sanctions on mainland China, allowing it to continue acquiring advanced chip equipment for its operations. This exemption is a crucial benefit, enabling it to access essential technology and equipment for chip manufacturing in its Chinese facilities. The uncertainty surrounding these exemptions had previously cast a shadow on Taiwan Semiconductor's operations in China. Still, extending this waiver provides stability and confidence for the company's growth plans in this vital market.
Notably, Taiwan Semiconductor operates facilities in Shanghai and Nanjing, focusing on producing 16-nanometer chips. While these facilities are not on the cutting edge of technology, they are still valuable as they cater to specific market demands and contribute to its overall global market presence. The extension of the waiver benefits the company's financial health and growth potential by ensuring its access to a substantial market and resources.
Fundamentally, Taiwan Semiconductor's operations in mainland China are of vital strategic importance, especially given the ongoing tensions between the U.S. and China. The company's role as a chipmaker and presence in China have made it a key player in the semiconductor industry and a focal point for geopolitical considerations.
The upcoming meeting between President Joe Biden and Chinese President Xi Jinping, which includes discussions on semiconductors, highlights the sector's significance in the two countries' relationship. This puts Taiwan Semiconductor in a position of influence and potential growth, as its operations and technology are central to these discussions. Positive outcomes at the meeting may simplify complex political and economic relationships, potentially leading to growth opportunities.
Further, Japan is considering providing substantial subsidies for two semiconductor projects, including a second Taiwan Semiconductor facility in Kumamoto, Japan. The financial support, which could amount to $10 billion, would significantly benefit the giant. The subsidies represent a fundamental benefit for the company's expansion plans, as they reduce the financial burden of establishing and operating semiconductor manufacturing facilities. Lastly, these subsidies will help it quickly secure a strategic foothold in Japan and enhance its global semiconductor supply chain position.
Moreover, the Japanese government's willingness to provide such substantial incentives indicates recognition of Taiwan Semiconductor's importance in semiconductor manufacturing. Its presence in Japan, focusing on producing six to 12-nanometer logic chips, aligns with the demand for advanced semiconductor technology, including for products like electric vehicles, which are part of the country's industrial and economic priorities.
Overall, these developments may benefit Taiwan Semiconductor in expanding its mature node (greater than 7 nanometer) market-capturing capabilities, which represent 41% of its revenue stream as of the third quarter.
Source: Third-quarter presentation
3Dblox 2.0 and 3DFabric, a transforming alliance
Taiwan Semiconductor's introduction of 3Dblox 2.0 signifies a significant step in enhancing 3D integrated circuit design efficiency. The early design capability provided by 3Dblox 2.0 enables designers to explore 3D architecture and simulate power and thermal considerations for the entire system. This holistic approach to design allows for better-informed design decisions and improves design productivity.
Technically, 3Dblox 2.0 supports chiplet design reuse features, including chiplet mirroring, which further streamlines the design process. This feature is valuable for designers, allowing them to leverage previously designed chiplets as well as reduces design time and effort. Taiwan Semiconductor's collaboration with key electronic design automation partners, such as Ansys (ANSS, Financial), Cadence (CDNS, Financial), Siemens (SIEGY, Financial) and Synopsys (SNPS, Financial), ensures that comprehensive design solutions fully support the company's 3DFabric offerings.
Fundamentally, Taiwan Semiconductor's 3DFabric Alliance has grown substantially and now includes 21 partners from across the semiconductor industry. This collaboration aims to provide customers with a full spectrum of solutions and services for semiconductor design, memory modules, substrate technology, testing, manufacturing and packaging.
The company's collaboration with key memory partners, including Micron (MU, Financial), Samsung (SSNLF, Financial) Memory and SK Hynix (HXSCL, Financial), is crucial in addressing the increasing demand for SRAM and DRAM memory in applications like generative artificial intelligence and large-language models. By advancing technologies like HBM3 and HBM3e, the company is ensuring that generative AI systems have the required memory capacity supporting the growth of these applications.
Looking forward, Taiwan Semiconductor's innovations in 3D integrated circuits and advanced packaging technologies support the growing demands of next-generation AI and high-performance computing applications. These applications require advanced memory, substrate technology and efficient testing, all of which are addressed by the company's collaborations and technologies.
Finally, collaboration with partners like Advanced Micro Devices (AMD, Financial) demonstrates how Taiwan Semiconductor's 3Dblox ecosystem has helped accelerate the time-to-market for 3D chiplet products. Overall, speed in product development is crucial. Thus, these developments benefit the company's sustainability and market share expansion by serving as a competitive moat.
Source: semiwiki
The code: N3, N3E and N2 technology mix
Taiwan Semiconductor's strong revenue growth is attributed to the successful ramp-up of its 3 nanometer technology (6% of third-quarter revenue). The 3 nanometer process is already in production and has demonstrated a good yield. This technology is poised to contribute significantly to the company's wafer revenue in the coming years, with a mid-single-digit percentage expected in 2023 and even higher percentages anticipated in 2024. The demand for 3 nanometer technology, driven by applications in HPC and smartphones, underscores the company's ability to stay at the forefront of the market expansion.
The company's focus on continuous technology improvement is evident in its roadmap for 3 nanometer, 3 nanometer enhanced and 2 nanometer technologies. N3 technology is already in production with a strong ramp. It is expected to contribute a growing percentage of wafer revenue in the coming years. N3E and N2 technologies further extend the capabilities and applications of Taiwan Semiconductor's technology platform. Therefore, this commitment to innovation keeps it ahead of competitors and attracts customers looking for the latest and most efficient semiconductor solutions.
Finally, in addition to its 3 nanometer technology, Taiwan Semiconductor has seen higher demand for its 5 nanometer technology. These advanced process nodes offer excellent performance and power efficiency, making them ideal for various applications. The sustained demand for 5 nanometer technologies contributes to the company's growth.
Source: Third-quarter presentation
Pinnacle fourth-quarter outlook and liquidity
The company is aiming for net revenue of $18.8 billion to $19.6 billion for the fourth quater of 2023, whereas consensus revenue estimates are $18.33 billion. Considering the third-quarter revenue of $17.28 billion, decisive revenue growth is projected.
Similarly, on the bottom line, the company expects a stable operating margin in the 39.5% to 41.5% range. This is in line with the third quarter's level of 41.7%. Therefore, Taiwan Semiconductor's financial performance can be considered remarkable not in terms of sequential growth, but under what environment (geopolitical and industry-wide adversity) it is projected.
On the other hand, Taiwan Semiconductor ended the quarter with cash and marketable securities totaling 1.55 trillion New Taiwan dollars, equivalent to approximately $48 billion. This substantial financial reserve enables continued investment in advanced technologies and offers resilience and a stable outlook against economic downturns (due to high interest rates on debt). It provides the necessary resources for the global fab expansion strategy.
Source: Investor.TSMC.com
Charting the forward motion of the stock
From a technical perspective, Taiwan Semiconductor's stock price currently stands at a support level of $85.65. However, given the ongoing downtrend, the price could reach the long-term support level of $73.40. The share price might enter a phase of accumulation or consolidation between the pivot point at $94.25 and the long-term support at $73.40, primarily because of its consistent interaction with the 52-week exponential moving average (represented by the black line).
Suppose price consolidation occurs within this range with positive developments, particularly in regard to geopolitical factors. In that case, there is potential for the stock to break through the significant weekly resistance at $105.15. This level holds considerable strength due to the change in polarity at this point (long-term pattern).
Over the mid-to-long term, $156 acts as a critical resistance level. However, the price may also loosely encounter resistance at the $136.50 level.
Source: tradingview.com
Concluding thoughts
In a dynamic geopolitical and economic environment, Taiwan Semiconductor's strategic positioning and technological advancements position it for significant growth. The extension of its U.S. trade sanction exemption ensures stability in its Chinese operations, which is vital for its global market presence.
Japan's potential subsidies for the company's new facility underscore its global strategic importance and focus on advanced technologies, which are essential for sectors like electric vehicles. Technological innovations like 3Dblox 2.0 and collaborations through the 3DFabric Alliance strengthen Taiwan Semiconductor's position in semiconductor design and packaging, addressing the needs of AI and high-performance computing.
Financially, Taiwan Semiconductor shows robust growth with a stable operating margin and significant cash reserves, enabling resilience and strategic expansion. Despite current volatility and downward trends, its stock shows potential for recovery and growth based on its strategic decisions, technological leadership and market demand for its advanced semiconductor solutions.
These factors collectively make Taiwan Semiconductor a compelling player in the semiconductor industry with promising prospects.
