Taiwan Semiconductor's Ties to Apple Are a Double-Edged Sword

NEW YORK (TheStreet) --Taiwan Semiconductor (TSM) reported strong results this week, and yet its shares fell. The reason? It turns out its close ties to Apple (AAPL) cut both ways.

TSMC's second-quarter earnings beat expectations, coming in at $2.30 vs. the consensus of $2.17. The company also beat on revenue, with NT $183.02 billion versus the NT $182.25 billion consensus.

However, investors were expecting a big quarter and now are selling on the news. The stock was trading at a 52-week high on strong expectations for Apple orders. All those Apple orders might be part of the problem. There is a concern that TSMC is so focused on Apple as a customer that other customers might look elsewhere for capacity and TSMC will lose its market dominance.

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Indeed, on the earnings call, TSMC's founder Morris Chang admitted to investors the company will be second in market share, presumably to Samsung (SSNLF) and GlobalFoundries, in 14/16nm in 2015, but expect to regain its market-leading position in 2016-2017.

Due to Apple-related supply constraints, TSMC has also lost orders from Qualcomm (QCOM). Digitimes reported that Qualcomm and MediaTek (among others) are looking to secure 28nm capacity from SMIC (SMI), UMC (UMC), and GlobalFoundries due to TSMC's constrained capacity. There is concern that capacity constraint issues could spill over to newer chips as well. According to Digitimes, Qualcomm has placed orders with Samsung and Globalfoundries for their next-gen 14nm process set to go live early in 2015.

TSMC recently traded around $20.50, up 17.5% for the year to date.

Rising Competition

Several key competitors, including Samsung and Intel (INTC), have made significant changes to their foundry management and accelerated the pace of their technology offerings to capitalize on TSMC's constrained capacity. For better or for worse, since grabbing Apple as a client form Samsung, TSMC's order flow is becoming Apple-centric. Ultimately TSMC is expected to land 60% to 70% of Apple's total 14/16 nm chip orders over the next few years, with the remainder going to Samsung.

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