The global enthusiasm for artificial intelligence (AI) has significantly eclipsed the geopolitical concerns surrounding Taiwan Semiconductor Manufacturing Co. (TSMC), as reflected in the unprecedented surge of the company's stock value. This heightened investor interest has elevated foreign ownership of TSMC stock to the highest level in two years.
This trend supports the company's assertion that AI technology will be a primary driver of growth in the current year. Significantly, TSMC has established a dominant position in the AI sector, commanding over 90% of the market for manufacturing advanced semiconductors required for AI applications, a statistic corroborated by Pictet Asset Management as we read in Reuters.
In stark contrast to the company's performance in the previous year, when TSMC experienced a significant decline in stock value, dropping by 27% in 2022, the company has now seen a remarkable turnaround. This downturn had followed billionaire investor Warren Buffett’s decision to sell his substantial $5 billion stake in TSMC, citing the geopolitical risks associated with the company's location in Taiwan.
Adding complexity to the geopolitical landscape, the election of Lai Ching-te as the president of Taiwan, who is seen favorably by the United States but regarded as a belligerent figure by Beijing, has further heightened tensions in the region.
Bernard Ahkong of UBS O’Connor Global Multi-Strategy Alpha offers an analysis of the evolving perception of geopolitical risks within the semiconductor industry. Historically, these risks were considered a significant detriment to the sector's stability and growth.
However, Ahkong suggests that the strategic importance of semiconductors and the growing desire to establish local supply chains have transformed these geopolitical issues into catalysts for growth in the industry. He implies that the semiconductor sector is currently in the early phases of a significant growth cycle, hinting at the potential for substantial advancements and expansions in the near future.
A central concern regarding TSMC's operations is its heavy reliance on Taiwan for its chip production capabilities. Taiwan is a critical hub in the global semiconductor industry, responsible for producing the majority of the world's advanced logic semiconductors.
The possibility of military conflict between Taiwan and China presents a significant risk, as any escalation could severely disrupt the global semiconductor supply chain, affecting numerous industries and markets worldwide.
TSMC's market dominance extends beyond its supremacy in the production of advanced chips. The company also holds a significant share, exceeding 50%, of the overall semiconductor foundry market.
This strong market presence indicates that TSMC is well-positioned to meet or even surpass its long-term growth objectives, which forecast a growth range of 15-20%. Anjali Bastianpillai, a senior client portfolio manager at Pictet, underscores this optimistic outlook, suggesting that TSMC’s market position sets a firm foundation for sustained growth and profitability.
The company's financial performance reflects the increasing demand for AI-related technologies. TSMC's revenue saw a 9.4% increase in the first two months of the year, driven largely by the burgeoning AI sector.
This growth has helped offset the decline in revenue from other areas, such as the slowdown in iPhone sales. Following a low point in October 2022, TSMC's stock has experienced a dramatic recovery, more than doubling in value.
This recovery is partially attributed to the success of one of TSMC's major clients, Nvidia Corp. On a recent trading day, TSMC's stock rose by 1.5%, continuing a trend that has resulted in a 29% increase since the beginning of the year.
TSMC is actively addressing concerns about market vulnerabilities by diversifying its manufacturing locations. The company has announced plans to expand its global footprint, including the construction of a second fabrication plant in Japan. Production in the new Kumamoto factory in Japan is set to commence this year.
Furthermore, TSMC is investing in the United States and Europe, with plans for two advanced facilities in Arizona and a new factory in Germany. These strategic moves are aimed at reducing the company's dependence on its Taiwanese operations and mitigating risks associated with geopolitical tensions in the region.
Gary Tan, a portfolio manager at Allspring Intrinsic Emerging Markets Equity, emphasizes the strategic significance of TSMC in the global investment landscape, particularly for those seeking exposure to the AI sector and the broader semiconductor market recovery.
He notes the rarity of finding companies of comparable quality and capabilities in emerging markets, highlighting TSMC's unique position as a key player and essential component for investors interested in these technology sectors, despite the ongoing geopolitical uncertainties.
18.03.2024
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