Last night I added a third potential Harris election victory winner to my Special Report “10 trump and 10 Harris winners” on my subscription site, JubakAM.com.
Here’s what I wrote about Taiwan Semiconductor Manufacturing (TSM) in that post.
Harris winner #3: Taiwan Semiconductor Manufacturing (TSM). Without a Harris victory, this is a good stock. With a Harris victory, this is a great stock. Two factors go into that assessment. The company recently announced that early production yields at its first plant in Arizona surpass yields from similar factories back home in Taiwan. The share of chips manufactured at the company’s facility in Phoenix that are usable is about 4 percentage points higher than at comparable facilities in Taiwan, the company reported last week. This is a big deal. This plant had been dogged by delays and conflict with workers. There has even been doubt that the company could find enough skilled workers in the United States for the factory. Taiwan Semiconductor is in line to win $6.6 billion in government grants and $5 billion in loans-—-plus a 25% tax credit-—to build three fabs in Arizona as part of the Biden Administration’s efforts to rebuild the U.S. chip manufacturing industry. The award, like almost all others from the 2022 Chips and Science Act, isn’t yet finalized. But as eye-popping as the money figures are, no company would go ahead with the huge investment required to build a new fab if the factory couldn’t turn out chips at a competitive cost. The good news on chip yield from the Arizona fab means that the economics will work in the United States. Which brings factor two into play. The company has reported early talks with the Biden Administration about a second Chips and Science Act. That could mean more funding for additional fabs in Arizona beyond the three now planned for completion in 2027 and 2028. The Arizona site has room to host six fabs. With shares of Taiwan Semiconductor trading at record highs a decision to buy the stock rests on margins. As the world’s dominant chip manufacturer at a time of heavy demand from AI chip companies such as Nvidia (NVDA) for bleeding edge speed, the company has substantial pricing power. It is planning to increase wafer prices by up to 10% in 2025, according to a Morgan Stanley note. The average price of a processed 300-nanometer TSMC wafer reached $6,611 in the fourth quarter of 2023, up 22% from $5,384 in the fourth quarter of 2022. If you add in the improved yield from the Arizona facilities and the possibility of more subsidized production from Arizona, there is good chance that gross margins, which have fluctuated between 46% and 60% for the past decade, will continue to recover from 2019 lows. Morningstar now expects gross margins to be between 54% and 58% for the next five years. I think that gross margins will be slightly higher than that with increased production from Arizona. So the buy decision on Taiwan Semiconductor rests to a great degree on the likelihood that the incentives in the first Biden Administration Chips Act will continue to move through the administrative pipeline, That is more likely to happen in a Harris Administration that is committed to following the industrial policy path of the Biden years. I think it’s impossible to tell at this point what industrial policy–if any–that a Trump Administration might pursue. It’s also much more likely that there would be a Chips Act II under a Harris Administration. At current record share prices, I think this distinction makes a difference.Taiwan Semiconductor has been a member of my long-term 50 Stocks Portfolio site October 7, 2019. The shares were up 324% since thins of the close on October 25.
