Why Taiwan Semiconductor (TSM) Can Soar Higher In 2024

As AI continue to progress and the demand for semiconductors are rising. This makes semiconductors crucial and we could say that it could the most strategically important technology.

In order to produce microchips, semiconductors formed the materials and circuitry which are key in manufacturing everything from smartphones to advanced satellites. To put it simply, we can think of microchips as the brains inside these advanced technology, especially in context for AI it is the brain to train the model and make these model to be usable on devices.

Over one trillion chips a year are made; one electric vehicle has 3,000 microchips. It is big business. Semiconductor chips sales in 2023 were roughly $526.8 billion.

The advanced chip-making business, which is extremely capital and talent intensive, has gone through a rapid consolidation as the number of companies produce cutting edge, high-performance chips has been reduced from 25 to 3.

Taiwan Semiconductor is the leader, closely followed by Samsung Electronics. As production has expanded in Asia, the U.S. share of chip manufacturing has fallen to 12%, according to a report by the Boston Consulting Group.

Samsung Electronics, building on its existing operations in Austin, is spending an additional $17 billion to build a chip-making factory in Texas that it hopes will begin operations in the second half of 2024.

As we are aware of the geopolitical issue over the semiconductor trade, we do see China catching up, they are about two to five years behind the leading chipmakers but is determined to catch up. China is providing at least $100 billion and year in subsidies to the sector and its national champion, the publicly traded Semiconductor Manufacturing International Corporation (SMICY).

TSMC has built a formidable economic moat around its business. An economic moat is a competitive advantage that allows a company to earn above-average profits over the long term by protecting its market share from competitors.

TSMC's economic moat is based on a few key factors:

TSMC invests heavily in research and development to stay at the forefront of chip-making technology. This has allowed the company to offer cutting-edge manufacturing processes and tools to its customers, making it difficult for competitors to catch up.

TSMC has economies of scale and scope that give it a cost advantage over its competitors. As the world's largest dedicated semiconductor foundry,

By mass producing chips for multiple customers, TSMC could achieve cost efficiencies through economies of scale. A small chip manufacturer faces relatively high costs to manufacture each chip—they have to set up and run their manufacturing equipment, pay for labor, and cover other fixed costs, with those costs spread out over a small number of chips. Thus, if the small manufacturer spends $100,000 on those startup costs but produces only 1,000 chips, their cost-per-chip is $1,000. But a large-scale mass producer like TSMC might produce 10 million chips, dropping their fixed costs down to $0.01 per chip.

Additionally, TSMC's broad customer base and manufacturing capabilities allow it to generate revenue across many different markets, making it more resilient to changes in any one market.

TSMC has developed an extensive portfolio of intellectual property (IP) that it licenses to customers. This includes patents for chip-making processes, design libraries, and other technologies. TSMC's IP is highly valuable to its customers, as it can save them significant time and money in developing their own chip designs.

Instead of designing their own chips, TSMC only manufactured chips designed by other companies—they were a manufacturing workshop. This offered distinct business advantages for TSMC through economies of scale and the opportunity to hone its production capabilities.

TSMC has built a strong reputation for quality, reliability, and innovation. Its customers trust the company to deliver high-quality chips that meet their specifications. TSMC's brand recognition and reputation make it easier for the company to attract new customers and retain existing ones.

All of these factors work together to create a formidable economic moat that has allowed TSMC to dominate the semiconductor foundry market. While other companies have tried to compete with TSMC, none have been able to match its combination of advanced technology, scale, IP, and reputation. As a result, TSMC has been able to earn above-average profits and generate significant shareholder value over the long term.

Based on 11 Wall Street analysts offering 12 month price targets for Taiwan Semiconductor Manufacturing in the last 3 months. The average price target is $168.11 with a high forecast of $188.00 and a low forecast of $150.00. The average price target represents a -6.44% change from the last price of $179.69.

With these factors working together to create a formidable economic moat that has allowed TSMC to dominate the semiconductor foundry market. While other companies have tried to compete with TSMC, none have been able to match its combination of advanced technology, scale, IP, and reputation.

Moreover, by focusing relentlessly on production, TSMC was able to optimize its manufacturing processes, invest in new research and development, and purchase cutting-edge lithography equipment at scale by buying in bulk. All of this made its manufacturing processes more efficient—leading to faster production times and ever-lower labor costs per chip.

Appreciate if you could share your thoughts in the comment section whether you think TSM is winning in the AI chips race?

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.