The Business Of
Semiconductors | TSMC | What Do They Do With Their Profits?
Morning All!
Yesterday we put together TSMC’s costs with their revenues. And we’ve covered a fair amount this week. So let’s have a quick recap…
Market Share: TSMC has ~56% of global chip manufacturer revenues. And this increases to ~92% when we think about the most advanced chips (<10nm).
Apple: The company’s largest customer is Apple with ~26% of TSMC’s revenues coming from making chips for iPhones and Macs.
EBIT Margin: The average S&P500 EBIT margin is 12%. TSMC’s is 50%! But with their near monopoly position, maybe I shouldn’t be so surprised…!
So, yesterday I resisted putting in the famous TBO EBIT margin rankings chart. But you haven’t had to wait for long. Because below, we can see our ranking updated to include TSMC. And what an extraordinary addition TSMC is - their yellow bar is head and shoulders above everyone else! It’s almost double LVMH’s margin…!
I could talk for another week just about TSMC’s stellar margin. But we need to march on. Because, with ~$69bn in revenues. And a 50% margin. It means TSMC made ~$35bn EBIT in 2022. And the question we’ll be answering today is - where does all that profit/cash go?!
More Factories, More Wafers, More Money…
So, TSMC and their cash. Do they reinvest cash back into their business? Do they return cash to shareholders? Or do they grow cash on their balance sheet? Well, as we see with most companies - it’s a combination! But we’ll start with how the company reinvests their cash.
And to help us understand how the company does this, let’s chat briefly about why TSMC’s customers don’t just manufacture their own chips. Why do they need to outsource to TSMC? Well, the reason is because manufacturing chips requires a huge factory (called a fab). And building these fabs takes 2-3 years, costs ~$5-15 billion, and requires ~6,000 construction workers to complete…
So for companies like Apple, Nvidia, etc. it makes sense for them to just design chips. And leave the manufacturing to TSMC and Samsung. But then what does that mean for TSMC and Samsung? It means it’s on them to spend the $ to build these factories! And these factory buildouts and equipment purchases (e.g. ASML machines) is the primary way in which TSMC reinvests cash into their business.
As we can see in the chart below, since 2003, TSMC have made $301bn in net cash from operations. And the majority of this cash (~64%) has been used for capital expenditures (factory builds and equipment).
Okay, so just to be super clear - how exactly is this TSMC reinvesting back into their business? Well, let’s look at what it actually means when TSMC builds more factories. More factories means TSMC’s chip manufacturing capacity goes up. And they can make and sell more wafers to customers! Which grows the company’s revenues and EBIT.
So, how many fabs does TSMC actually have? Well, TSMC currently has 9 fabs. With 4 of these being giga-fabs - which are basically huge sites with multiple factories on them. And the company’s latest capex plans involve building out 1 more giga-fab in Arizona.
But why Arizona? Why the US? When pretty much all of TSMC’s fabs have been in Taiwan? Well, we’ll cover this in more detail tomorrow. But the US have been very keen to move semiconductor manufacturing back over to the US. And the big piece of legislation that’s come into place recently has been the CHIPS Act. Check out that article for a nice, digestible read. And we’ll come back to this Act tomorrow!
Steady Dividends, Unsteady Politics
Okay, so we’ve seen how TSMC spend the majority of their cash. But how else do they use it? Well, the other main way TSMC use their cash is by returning it to shareholders. And by now, we should know that this comes in the form of a dividend.
Whilst the company has no formal dividend policy. The company has never decreased its dividend per share (DPS) from one year to the next since 2003. Management have always either kept DPS the same or increased it. Which is a pretty commendable effort! The chart below shows us that since 2003, 27% of the company’s net cash from operations has been distributed as dividends. That is a whopping $82bn in total!
And the consistent dividend payouts - along with TSMC’s stellar business model - caught the eye of a particular investor last year. In fact, the world’s most famous investor. Mr Warren Buffett (pictured below).
Back in Nov 2022, Mr Buffett bought shares in TSMC. And he’s since commented that ‘Taiwan Semiconductor is one of the best-managed companies and important companies in the world’. And he heaped further praise by saying that ‘there's no one in the chip industry that's in their league’. Not bad praise there!
However, the TSMC trade hasn’t turned out to be the most fruitful of investments for Warren. As Berkshire Hathaway (Buffett’s company) actually sold most of their shares in TSMC only a few months after purchasing them!
Why the change of heart? Well, Warren Buffett said that the reason for the sale was due to geopolitical tensions in Taiwan. Remember on Monday we said that Taiwan was the center of a lot of geopolitical conflict? And that TSMC was basically a Silicon Shield for Taiwan vs China? Well, tomorrow, we’ll touch on this a little more. Because if it’s concerning for Warren, it’s probably worth investigating further!
11th May 2023
Right, that’s a wrap for today! Tomorrow, we’ll look at the final piece of the TSMC puzzle. And touch on what the future looks like for TSMC.
Have a lovely day!
The Business Of Team