Taiwan Semiconductor Should Offer A Smoother Ride On Bumpy Roads

 

It’s relatively rare for end-user semiconductor demand to weaken much, but the semiconductor industry is nevertheless cyclical. The industry typically adds capacity in "big swings", typically in response to lengthening lead-times and shrinking inventories, and the combination of swings in available capacity with the economic cycle leads to the well-known cyclicality in revenues, margins, and earnings that have characterized the industry for decades.

With lead-times starting to ease off and growing expectations of inventory-building late in 2022 or in 2023, it looks like this latest boom cycle is coming to an end. Chip demand growth should continue to grow nicely, and the future for the sector is bright, but investors would do well to consider the risks of weaker guides, shrinking multiples, and weaker share price performances.

That brings me to Taiwan Semiconductor Manufacturing Company (TSM) (or “TSMC”). I was neutral on TSMC back in the fall of 2020 largely due to the valuation, and the shares have since lagged the SOX, as well as individual chip names I liked better, including Broadcom (AVGO) and Renesas Electronics (OTCPK:RNECY), and more or less matched the S&P 500. Given where the cycle is now, though, this may be a name to consider for investors who want to maintain exposure to the sector through the next readjustment phase.

 

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Taiwan Semiconductor Should Offer A Smoother Ride On Bumpy Roads

SUMCO's Rocket Ride May Not Be Over Yet

In the world of silicon wafers, two companies stand apart – Shin-Etsu (OTCPK:SHECY) and SUMCO (OTCPK:SUOPY). These two Japanese companies control close to 60% of the market between them, and an even larger share of the most sophisticated and demanding wafer types. I wrote about Shin-Etsu here, and now, it is time to take a look at SUMCO – a company that is benefitting from strong wafer price increases and healthy volumes as fabs continue to ramp up production of memory and logic chips.

SUMCO has already enjoyed a strong run and the wafer sector is cyclical. Right now, the industry is going through a significant up-cycle, but capacity additions have been restrained, and the outlook for wafer pricing over the next few years is healthy. While a lot is already in the share price, I don’t think SUMCO’s potential is tapped out just yet.

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SUMCO's Rocket Ride May Not Be Over Yet

The Ultratech Two-Step Continues

Although the market has cooled a bit on semi equipment names in recent months, Ultratech (NASDAQ:UTEK) continues to be its own worst enemy as revenue and order growth remain frustratingly erratic. On the positive side, the company enjoys a strong presence in advanced packaging and the support of major customers like Taiwan Semiconductor (NYSE:TSM), and it does seem as though the company's LSA tools are getting another look at 7nm and 10nm nodes. On the negative side, competition remains a real threat and it just seems like management cannot get this business on a steady trajectory.

A fair value in the mid-$20's is still valid assuming ongoing order growth in advanced packaging and 28nm laser annealing, with growth in inspection, nano, and sub-28nm annealing more of a "it'd be nice if it happened..." While the company does have over $9/share in cash on the balance sheet, it may be difficult for management to translate that into a meaningful M&A transaction.

These shares continue to have that "if they just get out of their own way" potential, but I can't argue that investors should favor this name over other equipment companies like Advanced Energy (NASDAQ:AEIS), Rudolph (NASDAQ:RTEC), and Orbotech (NASDAQ:ORBK) given the consistent inconsistency.

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The Ultratech Two-Step Continues

Seeking Alpha: Taiwan Semi Running Hard ... But Is The Track A Treadmill?

Although I think the "picks and shovels" concept is often overplayed as an investment philosophy, it's hard to argue that it doesn't have a place in certain industries. If you map the performance of semiconductor foundry operator Taiwan Semiconductor (NYSE:TSM) (or "TSMC") against the ten largest semiconductor companies (excluding Intel (NASDAQ:INTC)) over the last five years, only Avago (NASDAQ:AVGO), NXP (NASDAQ:NXPI), and Skyworks (NASDAQ:SWKS) have outperformed TSMC. At a minimum, then, I would argue that makes TSMC a valid idea for investors to consider when thinking about adding exposure to that sector.

As an investor who is here to make money, I find the debates over TSMC to be pretty interesting. Sell-side analysts do battle every month with what their "sources" claim is going on with major customers like Qualcomm (NASDAQ:QCOM) and Apple (NASDAQ:AAPL), while likewise speculating as to the timelines and performance characters of next-gen processes at rival fabs like Intel and Samsung.

At the heart of it all, though, I do have some concerns about the growth outlook for TSMC. The company has shown some cracks (from a competitive standpoint) at the 14nm/16nm node that didn't appear at 20nm, 28nm, and 40nm, and Intel and Samsung aren't going to let up. While the company has proprietary technologies that bulls believe can build/hold share, the race to 10nm is key to sentiment. Given my concerns about overall market growth, though, it's hard for me to find a lot of reasons to make this a core holding today.

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Taiwan Semi Running Hard ... But Is The Track A Treadmill?

Seeking Alpha: The Wait Drags On With Ultratech

If FinFET-related annealing orders eventually do appear in 2015 and the 3D advanced packaging opportunity develops as management hopes, Ultratech (NASDAQ:UTEK) will likely look like a study on the rewards of patience. If the trends seen throughout 2014 continue, it's going to be an experience in death by hundreds of papercuts.

Ultratech still isn't seeing the orders for its LSA systems that it needs to generate attractive margin leverage and get Wall Street enthusiastic about the shares. 2015 is shaping up as a make-or-break year, but then 2014 was supposed to be that way and leading chip producers like Taiwan Semiconductor (NYSE:TSM), Intel (NASDAQ:INTC), and Samsung delayed orders in response to FinFET yield issues. While a strong LSA cycle and growing interest in the company's advanced packaging and metrology products could eventually support a much higher share price, the high teens to low $20's is probably as good as it gets until/unless those orders start to show up in the company's books.

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The Wait Drags On With Ultratech

Seeking Alpha: Ultratech's Order Outlook Is Murky At Best

The past year was a miserable one for Ultratech (NASDAQ:UTEK) shareholders. The recurrent theme of the year was that weak 14nm/16nm yields weighed on orders for new LSA tools, leading to multiples "shifts to the right" in order and revenue expectations. Expectations for 2014 revenue fell from the range of $180 million to $200 million in late 2013 to $147 million as of this writing and now there is concern as to whether Ultratech has lost share to Screen Holdings (OTC:DINRY) and Mattson (NASDAQ:MTSN) and whether 10nm might sap the 14nm/16nm cycle altogether.

This certainly showed up in the stock's performance. Ultratech fell 37% last year, while Mattson rose more than 19% and Screen rose almost 13% (Applied Materials (NASDAQ:AMAT), which also sells thermal processing equipment rose more than 36%). It's not hopeless at Ultratech, and the company does have growth opportunities in advanced packaging, metrology, and atomic layer deposition, but 2015 is likely to be a long year for shareholders without some visibility and encouragement in LSA orders.

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Ultratech's Order Outlook Is Murky At Best

Seeking Alpha: FormFactor Coming Into Shape

In early December of 2013 I wrote that FormFactor (FORM) looked like an appealing risk-reward trade for more aggressive investors, as the market seemed to be very down on the prospects for the company to grow its SoC probe card business and improve its margins. Since then, the shares are up over 50%, with a big run over the past few weeks driven by improved guidance for the second quarter. There remain valid ongoing concerns as to whether FormFactor can improve margins enough to generate attractive long-term cash flow streams, but technology transitions in memory and logic could make the next couple of years very interesting for FormFactor.

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FormFactor Coming Into Shape

Seeking Alpha: Taiwan Semiconductor Keeps Building For The Next Act

If Glengarry Glen Ross gave us the motto of "always be closing", maybe Taiwan Semiconductor (or "TSMC") (TSM) can be said to follow a motto of "always be changing". TSMC not only has to stay at the edge in terms of process nodes, it has to keep pace with the volume needs and demands of its client base. This year will mark the fifth straight year of well above-average capital spending, as TSMC looks to keep its position as a leader foundry provider to communication chip designers and compete with Intel (INTC), Samsung, GlobalFoundries ("GloFo"), and United Microelectronics (UMC) in the emerging 10/nm14nm/16nm FinFET (or "FF") nodes.

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Taiwan Semiconductor Keeps Building For The Next Act

Seeking Alpha: Altera: A Semiconductor Catch-Up Play Long In The Making

More than half of the sell-side analysts covering Altera (ALTR) have a Buy/Strong Buy rating on the shares, with many of them calling for a catch-up trade relative to Xilinx (XLNX) driven by gains in 28nm and a strong start with Intel's (INTC) 14nm process. Discounted free cash flow does suggest that these shares are undervalued enough to be worth a good look, but management needs to deliver better margins and investors should not underestimate the challenges in competing with Xilinx.

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Altera: A Semiconductor Catch-Up Play Long In The Making

Investopedia: Reports Of TSMC's Imminent Demise May Be Greatly Exaggerated

There's really no such thing as “steady state” in the semiconductor industry, and fab operator Taiwan Semiconductor (NYSE:TSM) (aka “TSMC”) has the need to always stay on the leading edge of what its customers need and want in terms of chip manufacturing technology/capabilities. In addition to that constant pressure of migrating to the next generation, TSMC is facing the entrance of a major potential rival – Intel (Nasdaq:INTC).

While I think Intel's technological capabilities are not to be underestimated, the assumption that TSMC is in serious trouble seems misplaced. That isn't necessarily to say that the shares are cheap right now, but I see TSMC as a share-gainer in the fab space for the foreseeable future.

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Investopedia: OmniVision Showing Much-Needed Signs Of Improvement

The “up again, down again” story at OmniVision Technologies (Nasdaq:OVTI) rolls on, with the latest installment showing a sharp upward turn as the company's revenue and margins continue to show meaningful improvement. While OmniVision remains one of the market share leaders in the CMOS image sensor industry, that leadership has never meant stability or predictability and it probably never will. That makes this a tricky stock to recommend at almost any level – although these shares too look cheap, and may well ride the momentum of this positive quarter for a while, it's hard to believe that the market will ever fully reward the potential of this company.

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Investopedia: Ultratech Knocked Back, Not Knocked Out

For all of the times I lament stocks that got away, I've been lucky enough over the years to benefit from second chances as well. Semiconductor equipment supplier Ultratech (Nasdaq:UTEK) appears to be offering just such a chance right now. While there are certainly risks regarding the adoption of the company's advanced packaging and laser annealing technologies, to say nothing of competition from much larger companies, Ultratech's strong position at leading chip manufacturers like Intel (Nasdaq:INTC) and Taiwan Semiconductor (NYSE:TSM) argues that this company is still in the early stages of a significant revenue ramp.

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Seeking Alpha: Ultratech Ultrainteresting

While a very strong year for the stock has propelled Ultratech (UTEK) above $1 billion in market cap, this is still far from a household name in semiconductor equipment. That could still work in investors' favor, as Ultratech addresses several appealing markets with above-average growth potential. Although valuation does look a little stretched, waiting for this stock to get meaningfully cheaper could be in vain as it offers a clean balance sheet, solid growth prospects, and leverage to improving capital spending in the chip space.

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Ultratech Ultrainteresting

Seeking Alpha: Is The Growth Story Over For Hoya Corp.?

As a very loose rule of thumb, when I see a company with a solid history of returns on capital, good market share, and a clean balance sheet trading for mid-single digit multiples to EBITDA, I take a closer look. In the case of Hoya Corporation (HOCPY.PK), the debate is pretty simple - will this company ever really grow again or not? Nobody really seems to doubt that the company's traditional technology businesses have likely peaked (at least from a growth perspective), but there's ample doubt as to whether the company can (or will) reallocate its assets and build itself into a growth story once again.

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Is The Growth Story Over For Hoya Corp.?

Investopedia: For OmniVision, Weird Is Just Its Version Of Normal

It seems like nothing is ever normal with CMOS image sensor company, OmniVision Technologies (Nasdaq:OVTI). Accept that and it can be an intriguingly volatile trading opportunity. While the stock has often been batted around on rumors, worries and hopes tied to adoption from key customers like Apple (Nasdaq:AAPL), now margins have become another big variable. Consequently, while very strong revenue guidance for the next quarter really jumps, so to does the possibility of ongoing margin pressure. Not surprisingly, that continues to make this a very difficult company to model and a difficult stock to recommend or own.

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Investopedia: ASML Gets TSMC To Sign On The Dotted Line

So far, it looks like ASML's (Nasdaq:ASML) unconventional customer investment plan is shaping up as an offer that the biggest semiconductor companies can't refuse. Intel (Nasdaq:INTC) already committed to purchase as much as 15% of ASML's shares and invest over $4 billion, and now huge semiconductor fab Taiwan Semiconductor (NYSE:TSM) (aka TSMC) has chosen to join in as well.

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Investopedia: Is Moore's Law Fueling Intel's Investment in ASML?

Maybe the corporate world's never-ending capacity to surprise is what has kept me so interested in the equity markets for over 20 years. In the latest example, Intel (Nasdaq:INTC), a company famous for playing suppliers off each other and encouraging/supporting small up-and-comers, is taking a significant stake in lithography equipment maker ASML (Nasdaq:ASML) and agreeing to help fund the company's R&D efforts. While this is an unusual deal in many respects, it seems to acknowledge (if not cement) ASML's market leadership, as well as the challenges of continuing to push the leading edge of chip development.

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Investopedia: Volatility Is The Price Of Opportunity At FSI International

Financial writers love to write articles that talk about how if investors had simply bought "Super-Duper Tech Stock" back in the earliest days and held on tight, they'd be sitting on windfall profits and debating which island to buy for their retirement. What those articles often fail to mention is that the road from small up-and-comer to successful growth stock is never straight or smooth; there are bumps, potholes and detours along the way and some of them are real doozies.

That is worth remembering when it comes to wafer cleaning equipment company FSI International (Nasdaq:FSII). The volatility in growth and guidance over the past few quarters highlights several key points about this stock - there is real growth potential here, but the company is exceptionally vulnerable to any wobble in orders.

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Investopedia: Can MEMC Ever Find Full-Cycle Profitability?

Some businesses just intrinsically swing from shortages to a surplus over and over again, dragging suppliers through a roller-coaster of boom and bust cycles. That's broadly true of semiconductor equipment companies, and particularly true of MEMC Electronic Materials (NYSE:WFR) - a leading supplier of semiconductor wafers. While the wafer business is what it is (an inherently up-and-down business), bulls are hopeful that the company's SunEdison solar business can be a long-term sustainable growth driver.

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Investopedia: Strong Demand And Third Party Supply Issues Trip Up Qualcomm

Investors who have been waiting in the hopes of a chance to pick up Qualcomm (Nasdaq:QCOM) shares a little cheaper have gotten their wish after fiscal second quarter results. Struck between high demand for 28nm chipsets and supplier issues, Qualcomm lowered guidance and the Street punished the shares accordingly. With production problems likely a temporary setback, this may well be a good chance to build a position in a stock that is often expensive.

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