A key focus of the WCM Quality Global Growth Long Short Equity Strategy is to find quality global companies with durable, strengthening economic moats and corporate cultures aligned to this growth. A company that demonstrates these characteristics is Taiwan Semiconductor. This company is a classic ‘picks and shovels’ play in the fast-growing technology sector.
Established in 1987, Taiwan Semiconductor is the largest semiconductor foundry in the world, manufacturing 10,761 different products for 499 different customers. It boasts a long list of blue-chip clients including Apple, Sony, and Qualcomm.
During this video, WCM Investment Management (WCM) explains how Taiwan Semiconductor’s business model, paired with a company culture based on integrity and trust with its clients, continues to drive Taiwan Semiconductor’s growing economic moat.
Tom Hickey (TH): Hello, and welcome to this Stock in Focus update with WCM Investment Management. My name is Tom Hickey and joining me today from WCM is Brian Huerta, how are you Brian?
Brian Huerta (BH): I’m well, Tom, thank you.
TH: Fantastic. Today we’re going to be talking about a company called Taiwan Semiconductor. Can you tell us a bit about what they do?
BH: Taiwan Semiconductor is the world’s largest foundry, or contract manufacturer to the semiconductor industry. They have a blue-chip list of customers, more than 200 and many of the companies that we all know such as Apple, Invidia, Broadcom, Qualcomm, et cetera.
They’re really indispensable to the industry. The world really can’t move to 5G or internet of things or artificial intelligence without their help. They play such a critical role and will benefit from all these trends that we read about and are seeing in technology.
TH: So, a ‘pick and shovel’ sort of exposure to the technology sector.
BH: Exactly Tom.
TH: What is their competitive advantage and how do they fit into the WCM Investment Management criteria of having a growing competitive advantage?
BH: It really starts from their scale, the manufacturing scale, and their free cashflow and what it means to their R&D budgets. It takes billions of dollars for chip makers to go out and build a foundry. When they should and they choose to, it’s really focused around the design of the chip. So, if they could outsource the manufacturing and focus on design, it’s a win-win.
You just won’t see a lot of new fads pop up. It’s just too costly. Taiwan Semiconductor continues to generate a lot of free cashflow, which enables them to invest in the bleeding edge tech technology. They’re able to achieve scale and efficiency because of it. And as years pass on, they just continue to expand their moat as a result.
TH: What’s the culture like within the organisation and how does it support that sort of moat expansion?
BH: Well you can’t talk about Taiwan Semiconductor and culture unless you have some deference to their founder, Morris Chang, who really is a pioneer and a legend in the industry. One of the things that he really set out to do early on, and he made this part of the company’s values, is let’s never compete with our customers.
Keep in mind they’re working with customers that often compete with one another and they’re getting access to information about competitive roadmaps. That is very proprietary. They don’t want to compete with their customers and they also want to earn their trust. And they’ve really earned that over the years. There’s a certain level of ethics and integrity at the company that is spread throughout the whole organisation that really kind of brings to life this culture at Taiwan Semiconductor.
TH: Fantastic Brian, thanks for your time.
BH: Thank you, Tom.
DISCLAIMER: Past performance is not a predictor of future returns. This update has been prepared for information purposes only. Any figures provided in this document are unaudited and approximate. This post does not contain investment recommendations nor provide investment advice.
You are strongly encouraged to obtain detailed professional advice and to read any relevant offer document in full before making any investment decision. This is not an offer to invest in any security or financial product.
© 2022 Contango Asset Management Limited.
WCM Global Long Short Limited | Proposed restructure to address share price discount to net tangible assets