Comprehensive TSMC Analysis: Competitive Advantages, Qualitative and Quantitative Financial Metrics, Risks, and Future Growth Prospects for Investors
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Today, we are going to conduct an analysis of Taiwan Semiconductor Manufacturing Company. In this analysis, we will try to be as direct and concise as possible without adding empty content. That said, let's begin.
Table of Contents
Business Model
Company Management
Macro Environment
Current Company Growth
Quantitative Analysis of TSMC
BUSINESS MODEL
Taiwan Semiconductor Manufacturing Company (TSMC) is a key player in the global semiconductor supply chain. In fact, the Taiwanese multinational is the most important company in the world in this sector, providing chip manufacturing services to leading technology companies worldwide and playing a crucial role in advancing modern technology.
Additionally, it is important to highlight that the government of Taiwan is the largest individual shareholder of TSMC through state-owned entities. However, the majority of the company's shares are held by foreign investors, such as institutional funds and pension funds.
Furthermore, it is essential to mention that without the chips TSMC manufactures, the vast majority of modern devices and applications currently in existence would be unthinkable. For this reason, TSMC represents the backbone for many technology companies.
Let's look at the Geographic Distribution of Sales: TSMC according to data from Market Screener:
(The chart is created by Silver Font Investments and its team. The copyright of this chart belongs to the aforementioned. The data has been extracted from external sources to Silver Font Investments).
Having already explained the main fundamentals of the company, let's move on to see if it has competitive advantages. But what are the traits that, if they exist, indicate the presence of a competitive advantage? Well, these are the following: extraordinarily high profitability, pricing power, differentiation, and finally, captive customers. Let's now see if this company meets these traits and why:
Extraordinarily High Profitability
TSMC meets this criterion because its operational efficiency, economies of scale, and technological leadership allow it to convert a large portion of its revenue into profits.Pricing Power
TSMC qualifies due to its unique capabilities in cutting-edge technological processes and its high capital investment in R&D, which create significant entry barriers. This enables the company to set prices higher than the competition.Differentiation
TSMC fulfills this characteristic because its specialization, combined with continuous innovation in semiconductor technology, has positioned it as the global leader in its industry.Captive Customers
TSMC meets this criterion because its customers have a high dependency on its technological capabilities, and the substantial switching costs make it difficult for them to change suppliers, ensuring a stable and recurring customer base.
Let's now look at the 4 competitive advantages of Pat Dorsey and whether TSMC meets them or not:
Network Effect = Does not apply directly.
TSMC does not benefit from a classic network effect (like social networks or platforms), as its business is not based on user interaction.Switching Costs = Yes, it applies.
TSMC’s customers rely on its technology and manufacturing capabilities. Switching suppliers is costly and risky due to the investment in chip design and validation.Cost Advantage = Yes, it applies.
TSMC’s leadership in advanced nodes (3nm, 5nm) provides economies of scale and production efficiency, reducing costs compared to competitors like Intel and Samsung.Intangible Assets = Yes, it applies.
TSMC holds intellectual property, patents, know-how, and strategic relationships with key companies like Apple, Nvidia, and AMD. Moreover, its technology is difficult to replicate.
Another way to help us understand if TSMC has a competitive advantage is by understanding the very definition of competitive advantage. Therefore, a competitive advantage is: Having something that is difficult to replicate, allowing me to achieve extraordinary returns in a sustainable way. It is crucial that it is different and hard to replicate. This will attract more consumers and improve the company.
Starting from this basis, we understand that Taiwan Semiconductor Manufacturing Company does have this competitive advantage because what the company offers is exceedingly complex to replicate and at the same time holds value for other industries.
Once the competitive advantage of the company is understood, let’s move on to analyzing the threats the business faces. We believe it’s important to keep in mind that the greater the threats, the higher the business risk. To analyze these threats, we will use Porter’s Five Forces.
Threat of New Entrants: Low. Manufacturing semiconductors requires enormous investments in R&D and fabs, which makes it very difficult for new players to enter the market.
Bargaining Power of Customers: Moderate-High. Companies like Apple, Nvidia, and AMD depend on TSMC, but at the same time, they represent a significant portion of its revenue, which gives them some bargaining power.
Rivalry Among Existing Competitors: Moderate. Its main competitors are Samsung Foundry and Intel, but TSMC dominates with its advanced technology and leadership in 3nm and 5nm processes.
Bargaining Power of Suppliers: Moderate. TSMC depends on companies like ASML (for EUV lithography equipment) and other key suppliers, which gives them some bargaining power.
Threat of Substitute Products: Low. There are no viable alternatives to advanced semiconductors in the current market, keeping TSMC in a strong position.
MANAGEMENT
The future of any company depends on the management team, and a good management team is very important as it can determine the direction of the company. It is also important to know the number of shares the management team holds in relation to their salary. (It is important for a management team to hold a large number of shares because this incentivizes them to manage the company better, thus increasing the stock price.) Let’s now analyze the executive committee of TSMC: According to sources such as MarketScreener, the management team is primarily formed by:
Che Chia Wei, who is the Vice President and CEO of Taiwan Semiconductor Manufacturing Co., Ltd., as well as serving as CEO of TSMC Partners Ltd., a subsidiary of the same company. As of 31/12/2024, the number of shares he held was 6,392,834, which represents 0.02% of the total.
Secondly, Mr. Wendell Huang holds the position of Chief Financial Officer and Vice President at Taiwan Semiconductor Manufacturing Co., Ltd. Before joining this company, Mr. Huang served as Director and Supervisor at Global Unichip Corp.
However, other names also stand out in this field, as noted on TSMC’s official website such as:
Lora Ho, who joined TSMC in 1999, starting as Corporate Controller before becoming CFO and Spokesperson from 2003 to 2019. She later held the position of Senior Vice President of Sales in Europe and Asia from 2019 to 2022. It is also worth mentioning that she has chaired TSMC’s ESG Committee since 2011.
Ms. Ho’s education can be “summed up” mainly with an MBA from National Taiwan University and a Bachelor's degree from National Chengchi University.
Another relevant figure is Dr. Wei-jen Lo, who serves as Senior Vice President of Corporate Strategy Development at Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC). He has extensive experience holding various positions such as Vice President of Manufacturing Technology Operations at TSMC, Vice President of Advanced Technology Business at TSMC, Vice President of Research and Development at TSMC, Vice President of Operations II at TSMC, Director of Advanced Technology Development, and CTM Plant Manager at Intel.
Finally, it is worth concluding that many other relevant figures in TSMC stand out, but since we do not want to overly lengthen the article, the reader can refer to the article mentioned earlier for further details. Some of these figures and their respective positions are:
Rick Cassidy: Senior Vice President of Corporate Strategy Development.
YP Chyn: Executive Vice President and Co-Director of Operations.
Dr. YJ Mii: Executive Vice President and Co-Director of Operations.
J.K. Lin: Senior Vice President of Corporate Strategy Development.
Dr. Cliff Hou: Senior Vice President and Co-Director of Operations/Director of Information Security.
Dr. Kevin Zhang: Senior Vice President of Business Development and Global Sales and Deputy Chief Operating Officer.
Silvia Fang: Senior Vice President, General Counsel, and Head of Corporate Governance.
Dr. YL Wang: Vice President of Operations/Manufacturing Operations I.
Dr. Douglas Yu: Distinguished Member of TSMC and Vice President of Pathfinding for System Integration.
Dr. TS Chang: Member of TSMC and Vice President of Operations, Advanced Technology, and Mask Engineering.
Dr. Michael Wu: Vice President of Research and Development/Platform Development.
Dr. Min Cao: Vice President of Research and Development/Corporate Research and Pathfinding.
YH Liaw: Vice President of Operations/Manufacturing Operations II.
Dr. Simon Jang: Vice President of Research and Development/Advanced Tools and Modules Development.
Wendell Huang: Senior Vice President of Finance and Chief Financial Officer/Spokesperson.
Dr. CS Yoo: Vice President of Research and Development/More-than-Moore Technologies.
Dr. Jun He: Vice President of Operations/Advanced Packaging Technology and Services.
Dr. Geoffrey Yeap: Vice President of Research and Development/Platform Development.
Dr. Chris Horng-Dar Lin: Vice President of Corporate Information Technology/Chief Information Officer.
Jonathan Lee: Vice President of Corporate Planning Organization.
Dr. Arthur Chuang: Vice President of Operations/Facilities.
Dr. LC Lu: Member of TSMC and Vice President of Research and Development/Design and Technology Platform.
K.C. Hsu: Vice President of Research and Development/Integrated Interconnect and Packaging.
Ray Chuang: Vice President of Operations/Manufacturing Operations I.
Vanessa Lee: Vice President of Materials Management.
MACROENVIRONMENT
1.Analysis of the Hegemonic Competition Theory and its Relationship with TSMC
In this section, we will focus mainly on a key point that we consider crucial given the current global context and the type of company we are analyzing. To conduct this analysis, we will rely on the theory of hegemonic competition. But before we begin, let’s define this concept: The theory of hegemonic competition posits that the world order is determined by the rivalry between an already established dominant hegemonic power and an emerging power seeking to displace it and take its place. Therefore, this competition is based on the ability of nations to influence international law, geopolitical relations between local and regional powers, and control over the economic, military, and political systems within their area of influence.
Once we have defined the hegemonic theory, we can relate it to another theory that helps complement it and provides a broader perspective of the macroeconomic and macro-political environment. This theory is known as “The Big Debt Cycle,” and one of its main proponents is Ray Dalio. This theory broadly addresses economic cycles and mainly focuses on how nations go through periods of boom and bust (cycles largely driven by factors like debt, growth, fiscal policies, productivity, education, values, etc.). Dalio argues that a nation’s debt cycle can last between 50 and 75 years, with dominant or hegemonic nations eventually collapsing. We can see many examples throughout human history, such as the Spanish Empire, the Dutch Empire, the British Empire, etc. All of them experienced a great rise followed by a subsequent fall. It is important to keep in mind that this shift in power is a cyclical and natural process in human history.
So, how do both the “Big Debt Cycle” theory and the hegemonic competition theory affect TSMC? Today, the hegemonic power is the United States of America, which not only represents the world’s leading military force but also the world’s leading economy, with the U.S. dollar serving as the “global reserve currency.” However, several authors, including Ray Dalio in his latest book Principles for Dealing with the Changing World Order: Why Nations Succeed or Fail, claim that the decline of U.S. hegemony has already begun, and conversely, the rise of a new power like China could represent its successor. The main issue lies in the fact that China has vowed to reunify Taiwan with the mainland one day, and there are regular military drills and maneuvers to simulate a potential invasion and landing on Taiwan.
As one might expect, a hypothetical invasion would be disastrous for the company's stock, and that is why we have decided to discuss this possible hypothetical scenario. Although it might seem distant, it is always important to consider it to understand the risks one is exposed to.
2. Effects of Artificial Intelligence on TSMC
Predicting the future is not always easy, and we don’t have a “crystal ball,” so nothing we say should be taken as certain. However, we would like to make an assumption. Perhaps, the rise of artificial intelligence (AI) could represent a significant benefit for TSMC, as it could increase the demand for advanced chips used in AI applications, boosting its revenues and profits. In turn, TSMC could automate more tasks through the use of AI as it continues to evolve over the years. This hypothetical case could generate significant savings by optimizing processes, reducing errors, and improving operational efficiency.
Despite the competitive advantages AI may offer, it can also impact TSMC in various ways. Ultimately, the adoption of new technologies like AI and the integration of advanced processes could enhance competitiveness and innovation in other companies aiming to compete with TSMC for greater production independence.
3. Political Factors
TSMC’s major advantage over other companies is that the Taiwanese government is highly protective of the company, as it understands the strategic importance of TSMC in the sector. It is also important to note that it is not only the Taiwanese government that aims to protect TSMC, but the United States also "protects" the company from potential external threats for geopolitical reasons.
The Taiwanese government supports the multinational through favorable policies, incentives for innovation, and other measures that help ensure the security of the company. (It is essential to consider that the company represents a significant percentage of Taiwan’s economy, and today it symbolizes the nation's prestige and power, which is why the state is so attentive to its welfare).
CURRENT GROWTH OF THE COMPANY
According to Yahoo Finance in the following article in December 2024, TSMC reported approximately NT$ 278.16 billion in revenue, which is equivalent to USD 8.44 billion. This figure represents a year-over-year increase of 57.8% and an annual revenue growth of 33.9% compared to the previous year.
Let's illustrate some graphs created based on data obtained from TSMC's official page:
(The graph is created by Silver Font Investments and its team. The copyright for this graph belongs to the aforementioned creators. The data has been extracted from external sources to Silver Font Investments).
These other graphs can help us get a better understanding of the company's growth (for reference, it’s important to note that 1.0 equals 1,000,000,000).
QUANTITATIVE ANALYSIS OF TSMC
According to the data obtained from finviz.com, as of 03/08/2025, we can specify that TSMC has the following data:
What is TSMC's ROA?
TSMC has an ROA of 18.98%, meaning that for every 100 dollars invested in assets, the company generates nearly 19 dollars in net profit. In our view, we believe this is good, as it indicates high efficiency in using its assets to generate profits.
What is TSMC's ROE?
As for the ROE, it is 29.96%, which could indicate that for every 100 dollars invested by shareholders, the company generates nearly 30 dollars in net profit. We consider this a positive sign, as it demonstrates high profitability and efficiency in the use of capital.
What is TSMC's ROI?
As for the ROI, it is 22.67%, which could mean that for every 100 dollars invested in the company, it generates 22.67 dollars in return. We believe this is a strong profitability indicator, suggesting that the company is effectively using its investments to generate profits.
What is the P/E ratio of TSMC?
TSMC has a P/E ratio of 25.17 as of 12/31/2024, which suggests that investors are willing to pay 25.17 times the company’s current earnings per share. This makes us think that 25.17 could be a signal that investors expect solid growth from the company. However, it’s important to note that a high P/E ratio doesn’t guarantee success and may reflect an elevated valuation. What I want the reader of this article to understand clearly is that, while a high P/E ratio could indicate growth expectations, it could also mean that the stock is relatively expensive compared to current earnings. Therefore, investors should consider whether the stock price is justified by TSMC's fundamentals and future prospects.
What is TSMC's Net Margin?
Now, let's address the issue of Net Margin: In the case of TSMC, the company has a Net Margin of 40.52 as of 12/31/2024. This result reflects high efficiency in converting revenue into profit. Such a high margin may also suggest that TSMC has a strong competitive advantage and high demand for its products, as we mentioned at the beginning of the analysis. This Net Margin could also indicate that the company has effective cost and pricing control, allowing it to maintain these high profits.
What is TSMC's Price to Book Ratio?
TSMC's Price to Book Ratio as of 12/31/2024 is 6.97, which means that TSMC's shares are valued at more than 6 times their book value. We might think that this represents a high value and ask ourselves: Is TSMC's stock overvalued? Well, the fact is that the P/B ratio varies depending on the industry, but for an advanced technology company like TSMC, a high ratio like this could be justified if the company has growth prospects in a high-demand sector like semiconductors. However, it is important for the reader to compare this ratio with other companies in the same sector and draw their own conclusions to see if it is really out of place or not.
What is TSMC's Free Cash Flow?
As of 12/31/2024, TSMC's Free Cash Flow was 28,972.09 million dollars. This figure could imply: a high ability to generate cash, the capacity to finance its own projects and future investments, dividend distribution or debt reduction, and it also represents a strong position against potential competitors.
Warning: The team of analysts and writers at Silver Font Investments may make mistakes when gathering information or writing it. We are not responsible for any damage that may result from our words. Nothing written here should be considered as investment advice.
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