Now Is The Right Time To Buy Taiwan Semiconductor Shares

  • Taiwan Semiconductor has seen its top line come under pressure this year after losing a key Qualcomm contract.
  • The company, however, was able to win part of Apple's business for the supply of A9 chips for iPhone 6. This has given a nice boost to TSM's revenue.
  • TSM will supply 100% of chips for Apple's upcoming iPhone in 2016. The company's revenue woes are therefore over.
TSM stock analysis revenue analysis

Shares of the world’s largest contract chip maker, Taiwan Semiconductor (NYSE: TSM) have been making gains after the company recently released July sales numbers that showed that revenue for the month clocked in at NT$ 80. 953 billion ($2.61 billion), good for 35% M/M and 24.7% Y/Y growth. TSM shares have fallen out of favor with the investing world this year ever since the company lost a key Qualcomm (NASDAQ:QCOM) contract after Samsung opted to use its own chips instead of Qualcomm’s Snapdragon chips for the Samsung Galaxy S6 smartphone. Taiwan Semiconductor is the main supplier of Qualcomm chips.

The loss of the QCOM contract had placed TSM revenues under pressure for several months, with the company’s growth slipping into negative territory during the month of June.

Month Consolidated
Net Revenue YoY Change
Jan. 87,120 69.40%
Feb. 62,645 33.80%
Mar. 72,269 44.70%
Apr. 75,330 21.70%
May 70,155 15.40%
Jun. 59,955 -0.60%
Jul. 80,953 24.70%
Total 508,427 28.3%

Healthy iPhone 6 Sales a Positive for TSM

The strong growth is being driven by healthy Apple orders for A9 chips for iPhone 6. Apple (NASDAQ:AAPL) had initially planned to source A9 chips for the current year from Samsung and GlobalFoundries in a 3:1 ratio, but later decided to give GlobalFoundries' business to TSM in April due to poor yields by the former’s foundries. Apple Insider reported that GlobalFoundries’ A9 chip yield was just 30%, well below the 50% yield required for commercial production. This has provided an unexpected boost to TSM.

2016 promises to be even better for TSM since the company has been slated to supply 100% of A10 chips for Apple’s to-be-released smartphone. TSM will also supply 100% of the 20nm nodes that are used in Apple Watch. Samsung is tasked with supplying 100% Apple Watch chips during the current year.


New iPhone to provide a boost to TSM

TSM’s shares have been under pressure lately after Apple reported that it sold 47.5 million iPhones during the current quarter, which though good for 59% Y/Y growth, failed to meet heightened expectations for sales of 50 million units. Shares of many companies that do business with Apple have taken a hit as well.

But this might soon change. Apple is slated to release its next generation iPhone, iPhone 6s, in September. Apple shares generally perform well after the release of a new iPhone, and TSM shares often follow them higher.

Apple Share Performance After Release of a New iPhone

Apple Comeback-4

TSM had earlier revealed that it planned to ramp up production of its new 16nmFinFET chips during the second half of the current year. TSM is likely to see healthy orders for the chips given the fact that the popularity of Samsung Galaxy S6 will use up most of Samsung's chips leaving it with little to offer to the likes of Apple.

Apple SSD Connector Deal

TSM recently won a deal to supply Apple with SSD controller chips. Apple uses SSD controllers in its iPhones, Macbooks and iPads. With strong iPhone sales, TSM is likely to see strong demand for the connector chips from Apple.


Source: Storage Review

The Apple deal was likely not factored into the company’s revenue estimates for the year. This gives TSM a good chance to beat its top line estimates for the current year.

There is little doubt that TSM will enjoy good business in the coming months and years. Apple and Qualcomm reportedly tried to secure exclusive deals with TSM to have some of its foundries secured for their private use. TSM, however, turned down the offer since it prefers to maintain flexibility and the ability to switch production among its many customers. Apple is of course trying to reduce its reliance on arch-rival Samsung for supply of its iPhone chips, though by the look of things it will have little choice but to continue doing business with the giant smartphone maker. In the meantime, TSM won’t have to worry about operating its foundries below their full capacity, a major problem for  many semiconductor chip manufacturers.

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