Taiwan Semi Gets Boost From Mobile, Likely Apple Deal
Apple has been looking to reduce its reliance on Samsung for its mobile chips. And media reports have Taiwan Semi, also known as TSMC, picking up that business.
Apple and Samsung are bitter rivals in the smartphone and tablet markets. And Apple doesn't want to rely on a competitor for key components, especially one that it's accused of copying its device designs.
But potential Apple business isn't the only thing driving Taiwan Semi's stock price.
The chipmaker also is benefiting from its broad exposure to the mobile communications market in general. TSMC stock recently hit its highest level in more than 12 years.
"Getting the Apple business would be a tail wind for this company, but when you look at TSMC for the past year, the company has been driven by the mobile device trend -- smartphones and tablets," Morningstar analyst Andy Ng told IBD.
Communications chips accounted for 54% of its fourth-quarter sales. The next largest segment was industrial chips (23%), followed by computer chips (16%). Major customers includeBroadcom ( BRCM ),Qualcomm ( QCOM ) andNvidia ( NVDA ).
Taiwan Semi, the world's biggest contract chipmaker, reported a 32% increase in Q4 profit on Jan. 17 as brisk sales of smartphones and tablets kept its production lines humming.
Taiwan Semi earned 28 cents per American depositary receipt, up 40% from 20 cents in Q4 2011 and in line with analyst estimates. Total Q4 profit was $1.4 billion, up 38%. In local currency, profit rose 32%.
Sales rose 31% to $4.49 billion. In local currency, sales rose 25%, matching views.
The company's Q4 gross profit margin was 47.2%, up from 44.7% a year earlier but down from 48.8% in the third quarter.
"In the fourth quarter, demand for our products was higher than we expected three months ago, resulting in above-guidance revenue and profit margins," Taiwan Semi Chief Financial Officer Lora Ho said in a statement.
For the full year 2012, TSMC sales rose 18% to $17.12 billion, Taiwan Semi reported.
In the first quarter, the company expects revenue of $4.43 billion, up 24%. It forecast a gross profit margin of 43.5% to 45.5%.
TSMC expects its sales to grow 15% to 20% in 2013.
In the fourth quarter, TSMC shipments of newer 28-nanometer processor technology reached 22% of total wafer revenue, up from 13% in Q3. And 40-nanometer accounted for 22% of total wafer revenue. The smaller chips are in high demand for smartphones and tablets because they are faster and more power-efficient than previous generations, analysts say.
The addressable market for Taiwan Semi chips will increase as it moves to smaller processors, going from state-of-the-art 28 nanometer chips to next-generation 20-nanometer chips, according to Deutsche Bank analyst Michael Chou.
"We estimate the 20nm total addressable market (TAM) in 2014-15 to be 15% (to) 16% larger than the 28nm TAM in 2012-13," Chou said in a Jan. 17 research note. He cited accelerated adoption of 20-nanometer chips for smartphones and tablets and new markets forARM (ARMH)-based processors in mid- to low-end notebooks and servers.
Apple likely is interested in TSMC's 20-nanometer chip manufacturing. Volume production on 20-nanometer chips could begin as early as Q1 2014, says Pacific Crest Securities analyst Michael McConnell.
"We believe that a potential foundry agreement with Apple could serve as a fundamental catalyst for TSMC," McConnell said in a Jan. 17 research note. "We estimate that Apple's volumes could represent upward of $2.5 billion of incremental revenue to TSMC. Assuming an operating margin of 34% and a 14% tax rate, this would equate to 14 cents of incremental EPS to our model."
In a Jan. 17 conference call with analysts, TSMC Chief Executive Morris Chang said 28-nanometer chips have been a "resounding success" for the company. "In spite of a lot of attempts of the competition, we've enjoyed throughout the year (2012) close to 100% foundry market share in 28-nanometer technology."
He predicts that TSMC's production of 28-nanometer wafers will triple this year as the company aggressively ramps up manufacturing.
TSMC has the technology lead in the chip foundry industry with its 28-nanometer production, Ng says. And their planned increase in capital spending shows they're "pretty bullish" about the near-term future, he says.
TSMC competes with Samsung Electronics, Global Foundries andUnited Microelectronics (UMC).