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Here's Why You Should Invest in Taiwan Semiconductor

NEW YORK (TheStreet) -- Taiwan Semiconductor Manufacturing Company (TSM - Get Report) was established in 1987 as the world's first dedicated semiconductor foundry, building and selling its own integrated circuit products.

What does this mean to you as an investor?

The company has more than 600 customers manufacturing more than 11,000 products for various applications covering a wide variety of computer, communications and consumer electronics market segments. As a pure-play foundry it has captured approximately 50% of the market.

Growth Case: Smart Phones, Tablets, and 3-D

The investment case for TSMC is fairly straight forward: mobile computing and network/cloud infrastructure is driving the demand for complex semiconductor devices. TSMC is by far the dominant player in the industry and there are huge barriers to entry. The company allocated $10 billion to capex in 2013 and devoted an additional $1.65 billion in R&D. Even mega-techs like Samsung (SSNLF) and Intel (INTC) have difficulty competing at that level.

Despite lackluster performance from many technology names this year, semiconductor companies have held up well in the current market environment, spurred by these favorable underlying industry fundamentals. The Philadelphia Semiconductor Index (SOXX) is up 18% for the year, and TSMC shares, trading near $21 have done even better, up almost 20% for the year to date.

TSM Chart
TSM
data by YCharts

According to DigiTimes, TSMC's production capacity has been booked through the end of the third quarter due to orders from handset and PC chip vendors. To quantify things further, each smartphone sold contributes $10 (US) to TSMC's revenue.

Growth is being supported by strong seasonality, demand for low-end smartphones, China's push into 4G, and orders from Apple (AAPL). TSMC management believes that 20nm will generate 20% of revenue this year, with Apple contributing close to half of that.

Looking to the future, Taiwan Semi announced June 3 it's working with Micron (MU) on 3-D IC development. So TSMC is also dedicated to ramping up its 3-D technology. This is interesting considering Amazon's (AMZN) latest foray into 3-D smartphone technology.

Competition

TSMC is not without its competition however. Intel is certainly a key competitor. Industry watchers continue to debate whether Intel or TSMC has the better 14m/16nm technology, but both are likely to be viably competitive.

Samsung is another formidable competitor as it has the potential to convert some of its commodity memory plants over to the production of logic chips. The advantage afforded by Samsung's vertical integration could further expand in the coming years as technology for multi-chip bundles that combine both memory and logic devices becomes more economically viable in the future.

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