Buy Taiwan Semi as It Gets a Bigger Piece of Apple's Pie

NEW YORK (TheStreet) -- A number of analysts are raising estimates ahead of Taiwan Semiconductor's (TSM) scheduled earnings release July 17. Of the 32 analysts polled by FactSet, 27 of them raised their estimates in the month of June.

The main source of that revenue momentum is coming from Apple (AAPL), which is expected to contribute from 13% to 15% of TSMC's revenue in the second half of this year, up from only 4% in the second quarter. TSM stock recently traded at $22.31, up nearly 28% for the year to date.

TSMC should see a very aggressive ramp-up of 20 nonometer (nm) revenue starting in the third quarter. According to DigiTimes, TSMC plans to operate at full capacity during the second half of this year.

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With 20nm orders coming in from Apple and other leading edge customers such as Xilinx (XLNX), AMD (AMD), and Qualcomm (QCOM), analysts are expecting the revenue contribution from 20nm to rise to 20% by the end of the year.

Apple is launching a bunch of new products this year. The iPhone 6 is coming out in September. A new iPad Air is coming out in the fourth quarter of 2014. A potential larger iPad is coming out in the first half of 2015. All of these products are expected to be migrating to 20nm A8 mobile application processors manufactured by TSMC.

TSMC's 20nm process technology is smaller and can provide 30% higher speed and while using 25% less power. But technological superiority is not the only reason that Apple is further utilizing TSMC in its supply chain. Given ongoing lawsuits and direct competition from Samsung (SSNLF) products, Apple is trying to shift away from using Samsung as its primary supplier.

Apple is still one of Samsung's biggest customers for processors and memory chips. Apple's component orders from Samsung were around $10 billion last year. But it is no secret that Apple is hoping to ditch Samsung in favor of other companies such as TSMC and privately held Global Foundaries.

Apple has, in the past, asked to invest in TSMC or have TSMC set aside factory space dedicated to Apple chips. But TSMC's Chairman Morris Chang rejected these requests, preferring instead to remain more independent and flexible. But given Apple's strained relationship with Samsung, it is expected that TSMC will continue to become a bigger part of Apple's supply chain and therefore receive a bigger share of Apple's pie.

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Taiwan Semiconductor (TSM) is currently ranked #89 out of our 3800+ stock universe and receives an overall grade of A-. It is a large-cap technology name with a market cap of $113.9 billion. Its risk profile is considered conservative. The company's annual revenue last year was $20.5 billion.

We started buying shares of the stock in late March. Another attractive aspect of the shares is that it pays a 1.9% dividend. We own it for our Income and Growth accounts.

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