Everything is working out exactly as I planned when I bought Taiwan Semiconductor Manufacturing (TSM) on October 20, 2009—with the small exception of the share price.
When the company reported fourth quarter 2009 earnings on January 28, it confirmed the two major parts of my investment thesis.
First, a global recovery in the PC, wireless handset, and digital consume product markets has started to drive up sales. In the fourth quarter sales grew by 43% from the fourth quarter of 2008. For 2010 Taiwan Semiconductor forecast a 29% growth rate for the semiconductor foundry industry.
Second, Taiwan Semiconductor’s investment in research and development and in new manufacturing plants has so far distanced the company from its competitors that it is seeing rising prices and margins for its next generation chips. In 2009 Taiwan Semiconductor worked through problems with electricity leakage in its new 40 nanometer generation of chips that had kept yields low. (In semiconductor manufacturing how many working chips you get from each piece of silicon is a critical determinant of profit margin. For example, if enough electricity leaks from a chip’s circuits—especially in chips that pack transistors extremely tightly together, the manufacturer has no alternative but to throw the chip away.) Competitors are still struggling with these problems and that’s given Taiwan Semiconductor an effective market share of 91% in 2009 in the newest and most profitable 40 and 28 nanometer chip generations, according to Deutsche Bank. And because of the company’s manufacturing and R&D advantages that share, Deutsche Bank estimates, will be 89% in 2010 and 86% in 2011.
The company’s customer list for 40 nanometer chips reads like a who’s who of next generation technology products: Intel (INTC), Qualcomm (QCOM), Broadcom (BRCM), Marvell Technology Group (MRVL), and Nvidia (NVDA).
That’s a long time to have control of a new chip cycle. And exactly when the profit margins on a chip generation are highest.
The only thing wrong with shares of Taiwan Semiconductor is the current correction in the technology sector. Once that’s over—and it will end—I think the stock price is headed up on the fundamentals. See why you want cutting edge technology stocks in your portfolio to combat the effects of a profitless recovery https://jubakpicks.com/2010/01/19/get-your-portfolio-ready-for-the-profitless-global-economic-recovery/
As of January 29, I’m upping my target price slightly to $12.50 a share by May from the former target of $12.
Full disclosure: I own shares of Marvell Technology Group, Qualcomm, and Taiwan Semiconductor Manufacturing in my personal portfolio.
Some of the tech stocks Jim mentions sure do smell like Apple circa December 2008. I remember looking at the sub-$100 share price for AAPL (despite the runaway success of the iPhone even during the crash) and going, “Are you serious?” I felt like Apple hadn’t really done anything to deserve getting hammered that hard and so I bought a little stock. When it doubled in value over the next year, I felt sort of vindicated. The fundamentals have to take over sooner or later, if you can just hold out long enough.
Jim,
Hi, I’m a new investor, been reading your column for awhile. I’ve been eyeing MRVL for the last week and have almost bought several times.
With this article TSM also interests me.
Both seem to be troubled by only the downturn in the tech sector not the fundamentals. As a small new investor it is important for me not to jump in too early I think.
My question is, do these 10% corrections normally end there or do they sometimes run into 15-20% corrections. How and when can I feel safe pulling the trigger on MRVL or TSM?
Thanks alot for the help!
TSM comes with a dividend of 3.6% at $10/sh.
Hi Jim,
I’ve been trying to find any news on MXWL to see why it’s taking it on the chin lately. The market is going down, but MXWL seems to be going much faster. Is this more momentum players exiting the stock or is there a piece of news out there that doesn’t bode well for the future sales?
Jim,
I’ve been an avid reader of you for the last several years and appreciate your work greatly.
One company I remember you have mentioned looking for an entry point when it dipped lower is Flowserve (FLS). It is down below 90 today when it was at 107 less than two weeks ago. Is this an entry point?
eventually, I can now post.
My question, Jim, is: how do you reconcile Nucor’s results and comments with an economy recovering from deep recession?
This is why we love you!