Taiwan Semiconductor Manufacturing (TSMC): background

what TSMC is

In the early days of semiconductors, chip-making firms tended to be vertically integrated, meaning the companies that designed semiconductors also manufactured them in their own plants.

That changed as the semiconductor industry began to expand rapidly in the early 1990s, for several related reasons:

–chip designs became progressively more specialized and complex, putting increased focus on the design process

–the cost of building chip fabrication plants to manufacture newer, higher-specification, designs rose exponentially, putting them out of reach for all but the biggest firms, and

–TSMC opened in 1987 as a third-party manufacturer, allowing dedicated design shops to set up on their own and still be able to have their designs fabricated.  The design business, something at which Americans have excelled, has flowered since.

Today, TSMC is the most advanced chip manufacturer in the world, and by far the best third-party fabricator, matched only by Samsung, an integrated firm, and maybe Intel.

 

semiconductor equipment makers

Today’s semiconductor fabs are extremely expensive.  TSMC has just agreed to build a new fab in Arizona, for example.  The cost:  $12 billion.  (More on this in the accompanying post)  The equipment inside, the most advanced pieces of which can cost hundreds of millions of dollars, comes from a small number of specialized machinery firms, which are located mostly in the US, Japan or the EU.  Because of the complexity of semiconductor manufacturing and the expense and long lead times involved in developing and testing new equipment, there tend to be very close cooperative research and development relationships between the fabs and their equipment manufacturers.

 

foundries are the future…

…absent some revolutionary change in computer technology.  A decade ago, when I was more up-to-date on semiconductors, a state-of-the-art fab cost about $4 billion.  Operated efficiently, it would churn out, say, $7 billion worth of output.  Both figures are out of reach for most firms.  Hiring a trusted third party to manufacture your designs is the easiest way to go.  Although the ratio of sales to assets has shrunk since I was better informed, the absolute numbers have risen a lot.

 

 

 

 

 

investing in tech (ii)

other tech characteristics

–unlike areas like, say, fossil fuels, tech will likely continue to experience strong growth for a long period of time

–tech is also an area where the US has a comparative advantage, due to the presence of  strong tech-oriented universities, the large size of the existing tech community and the easy availability of capital to finance new tech ventures

a French scholar as tech banker

Early in my career, I had an acquaintance who had spent her life to that point studying for a PhD in French literature, intending to teach at a university somewhere.  She should have studied at least some economics in addition, because, like me, she finished here degree just as the Baby Boom finished college and universities stopped hiring new faculty.  I’d become an equity securities analyst; she’d become a banker to tech companies.  Initially, she was worried that her lack of a science background would be a severe negative.  She found, however–as I did–that electrical engineering was far less important than being able to figure out whether there was any demand for the stuff a given tech company made, at what price, and whether there was any competition.

I think this is still true today–meaning that most people can be successful tech investors, provided they’re willing to put in time and effort.  While a technical background (or access to a friend or relative who has one) is a plus, common sense and a little supply/demand economics is much more crucial.

active or passive/individual stock or fund

The simplest, and lowest risk, way for any of us to increase the tech component of our equity exposure is to replace an S&P 500 index fund/ETF with a tech sector index fund/ETF .

There are also subsector funds/ETFs that allow a narrower focus on, to name a few popular subsectors, internet or cypersecurity or semiconductor stocks.  There are even a few actively managed tech ETFs, although it’s not clear that these outperform passive vehicles.

The largest rewards, and the greatest risks, come with buying individual stocks.  My approach to holding an individual tech stock is pretty much the same as for holding any other type of individual stock.

More tomorrow.

 

Softbank and ARM Holdings

a brief history of Softbank

Softbank is a Japanese company incorporated in 1981.  It has a non-establishment CEO, Masayoshi Son, notoriously opaque financials and a reputation as a maverick in its home country.  The company’s earliest successes came as an investor partnering with international internet companies entering Japan, like Yahoo and eTrade.  It was also an early supporter of now-huge Chinese internet businesses.

In 2006, it became an active business owner, entering the Japanese cellphone market by acquiring Vodafone’s network.  It revolutionized that business in Japan by rebranding as Softbank Mobile and launching a very successful discount cellphone service.

In 2012 it decided to employ the same strategy in the US, buying a controlling interest in Sprint.  Softbank appears to me tohave made the bold $21+ billion commitment thinking it could build a viable nationwide network by merging Sprint with T-Mobile.  Anti-trust regulators prevented that from happening, however, leaving Sprint in its current weak position and Softbank with a mess.

About a year ago, perhaps chastened by his Sprint error, Mr. Son announced he was stepping down as CEO and hired his apparent successor, Google executive Nikesh Arora.

Late last month Mr. Arora, who had been working to reduce Softbank’s financial leverage through asset sales, announced he was leaving the company, and Mr. Son that he was now planning to remain as CEO for perehaps ten more years.

This weekend we learned why–Softbank announced that Arm Holdings, the UK-based chip design firm, had accepted its all-cash bid of £24 billion ($32 billion), a 40%+ premium to its Friday close in London.

which Son is making this purchase?

Is it the prescient buyer of Alibaba and Vodafone Japan?    …or is it the sorely disappointed purchaser of Sprint?  Mr. Son is apparently arguing that development of the Internet of Things will generate a surprisingly large explosion of licensing fees and royalties for Arm.

More tomorrow.

buying Microsoft (MSFT) !?!

Yes, that’s what I’m beginning to do.  I’ve bought a small amount and intend to add to it on weakness.

For me, this is an unusual step, since MSFT isn’t exactly what you’d call a growth stock.  Quite the opposite.  It’s a value idea.  I’ve been building to it for some time, though.  I few months ago I wrote that in a year like 2014, where I imagined (and still do) that a stock that’s up by 10% will be an outperformer, the bar is set pretty low.  And after thirteen years of decline vs. stocks in general, the news that the company had dysfunctional management and had gone ex growth had been pretty thoroughly worked into the stock price.  My son-in-law told me it’s the nicest thing he’s ever heard me say about MSFT.  (It was a big part of my portfolios all through the 1990s, however.)

I also privately scoffed at prominent value managers who loaded up on MSFT several years ago purely on the notion that the stock was cheap, ignoring the issue that change of control was well-nigh impossible.

What’s changed?   …or, better, what’s changed my mind?

As I mentioned above, the market situation is one thing.

The stock’s metrics haven’t moved much:  steady cash flow of $3+ a share, earnings of $2.75, a dividend yield of just under 3%.

There’s a chance earnings may improve over the next few years:

–the board of directors has put new top management in place.  A cadre of looks-good-in-a-suit-but-doesn’t-do-much lieutenants are disappearing, as well.  There’s no guarantee that the new guys are any better than the old.  On the other hand, it’s hard to imagine they’ll be worse.

–Apple’s failure to produce an adequate alternative to the Office suite has limited the inroads it can make into MSFT’s corporate market.

–Windows 8 (I just got a new touch-screen laptop) is pretty good–very iPad-ish.

–a new generation of Intel chips + the emergence of Samsung, Asus (my brand), Acer and Lenovo making high-quality products may well reenergize the US consumer market.  Much lighter weight, high-resolution screens, instant-on and touchscreens may counter some tablet momentum.

–with its consumer/small business products, MSFT has had a continuing (large) piracy problem.  The shift to the cloud will help police that.

–new management may do good things.  Even if not, the idea that the company is turning a new page will likely support the stock until we can make a better judgment.

ASML’s orders bonanza

ASML’s announcement

ASML is a leading maker of semiconductor production equipment, based in the Netherlands.  Its specialty is lithography machines, which semiconductor makers use to transfer the design structure of their chips onto silicon.

When reporting 3Q2010 earnings on October 13, ASML said it anticipated December quarter order bookings to be over €1.3 billion.  Last Thursday, the company said it now expects the figure to exceed €2.0 billion.  This compares with new orders of €1.0 billion in the comparable period of 2009.

ASML made several comments about this recent rush of new business:

–it’s coming from all sectors of the market,

–the DRAM segment, which tends to lurch wildly between under- and over-supply, is on the downswing, but it’s milder than anticipated,

–demand for NAND flash is up, particularly for use in new devices (meaning tablets and maybe Chrome-OS netbooks–anything that uses “solid-state” storage), and

–decisions to build new fabrication plants, both by foundries and logic chip makers.

my thoughts

1.  ASML’s customers are highly capital-intensive.  Firms like this–at least the ones without a death wish–rarely, if ever, outspend their cash flow.  Most  times their spending will stay close to that level, however.  So it’s reasonable to conclude that chip makers have seen a large boost to their cash intake over the past couple of months.  Demand for their products is surprisingly strong.

2.  Consolidation in the chip making industry over the past decade has given the surviving, now much larger, chip makers a considerable increase in market power over suppliers.  This allows them to order at the last minute, three to six months in advance of needing new capacity.  I think it’s safe to conclude that semiconductor makers believe the recent upsurge will carry over well into 2011.  Yes, orders can be cancelled, but Intel, Samsung, TSMC and whoever else is placing large new orders all believe this upturn is for real.

3.  I don’t think it’s an accident that these new orders are materializing at the same time as we are hearing reports of increasing consumer confidence and a surprising uptick in consumer spending.  Looking at stocks in general, I’m not sure whether it matters if the force ultimately behind the new ASML orders is consumer or industrial.  I suspect it’s an interaction between the two.  An employee sees his company upping its capital spending by 20% for 2011.  He concludes business is better, his job is (finally) safe and he might even get a raise.  So he loosens his purse strings.

Anyway, the ASML orders suggest that the economic upturn is reaching critical mass, where it is beginning to feed on itself–or reach “escape velocity,” as economists seem to want to characterize it.

4.  I take the ASML announcement as yet another piece of confirming evidence that the news for stocks will be good over the coming, say, six months.  I also think it means good things are in store for technology stocks and for ASML as a company.  ASML the stock?  …I don’t know.  Semiconductor production equipment companies are a highly volatile, highly cyclical bunch, that trade on second- and third derivatives of the actual orders news.  They also trade on anticipated timing of the peaks and troughs of the equipment cycle–and, again, far in advance of the actual events.  For me, this industry is better left to experts.