Why Is Taiwan Semiconductor Stock So Cheap?

Smartphone prices are falling, but it may not be time to sell chipmakers.

Andrew Willis 17 March, 2023 | 9:11AM
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Interested in more cheap stocks? Check out Canopy Growth, from last week.

Andrew Willis: Smartphone prices are deflating, falling around 22% year-over-year as of last December, according to U.S. Bureau of Labor statistics. What does the mean for the coveted microchips that run the things?

Welcome to the cyclicality of the semiconductor sector. Investors may have been anticipating the chip shortage we experienced would turn into a glut, selling stocks like Taiwan Semiconductor (TSM). But that perceived weakness is also a strength for the company in the consolidating semiconductor sector where it holds around half of the market share according to TrendForce data.  

How many companies have the massive resources and time for such a cyclical business? Also, as an independent manufacturer, Taiwan Semiconductor has the option of selling to new customers for lower-cost applications – while they research the next near-exclusive technology.

For Morningstar, I’m Andrew Willis.

 

bulls Bulls Say

  • TSMC should consistently earn higher gross margins than competitors thanks to its economies of scale and premium pricing justified by cutting-edge process technologies.
  • TSMC wins when customers compete to offer the most advanced processing systems using the latest process technologies.
  • TSMC will benefit from more semiconductor firms embracing the fabless business model and internet giants designing their own data center chips.

bears Bears Say

  • Although TSMC is the foundry leader, each generation of process technology matures and commoditizes quickly, forcing the company to deal with pricing pressure.
  • TSMC's new approach to diversify production geographically may add cost pressures with little added resilience to stability.
  • Samsung and Intel are committed to heavy capital spending under the support of the U.S. government. SMIC and other state-supported Chinese foundries also lurk as potential threats.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Samsung Electronics Co Ltd40.60 USD-29.70
Taiwan Semiconductor Manufacturing Co Ltd ADR129.53 USD0.36Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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