Episode 90 | TSMC’s Business Strategy and Global Expansion

In Episode 90 of “Market News with Rodney Lake,” Professor Lake, director of the GW Investment Institute, evaluates Taiwan Semiconductor (TSM), highlighting its dominant role as a leading outsourced chip manufacturer that does not compete with its clients. Lake emphasizes Nvidia’s strong AI-driven revenue growth, elite margins, and robust free cash flow supported by advanced, large-scale production capabilities. He also examines the valuation and balance sheet strength, noting how geopolitical concerns and manufacturing concentration may temper the valuation outlook. The discussion underscores strategic shifts such as expanding production into the U.S. and Japan, as well as emerging competition like Tesla’s TeraFab, ultimately reinforcing TSM’s durable competitive advantage, disciplined management, and pricing power, with a focus on monitoring geopolitical developments and global manufacturing expansion.

Transcript

Thank you for joining Market News with Rodney Lake. This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the director of the GW Investment Institute. Let's get started. Welcome back to Market News with Rodney Lake. I'm your host, Rodney Lake. In today's episode, we're going to go over a company.
Reminder, this is a GW Investment Institute podcast. This is for entertainment and educational purposes only. We're coming to you from the George Washington University School of Business. Duquès Hall, Duquès family studio. Shout out to the Duquès family. Thank you very much for our fabulous studio. All right. What company are we going to talk about today? Of course, there's tons going on in the market.
We'll talk about that another episode. But we're going to today tackle a company as we do. And we use the BMPB framework Business, Management, Price/Valuation framework, which the Institute uses for our fundamental classes and our students, used for our fundamental analysis classes. And even some of our quant students build models that have some similarities that quantamental models that they might use to use fundamental and quantitative together.
But today we're going to go over Taiwan Semiconductor ticker TSM. We own this in some of our portfolios. Again disclaimer not investment advice, educational entertainment purposes. We certainly hope we're entertaining, only. Certainly subscribe to the channel. Thanks to the people who come back to watch us on YouTube and listening to the podcast. Apple, Spotify, Amazon, wherever you listen to it.
Thank you very much. Send us some comments, send us some questions, let us know. Maybe there's a company that you would like us to cover. We'd love to hear from you. We'd love to hear topics you might want to talk about that are related to the market, of course, related to investing. You should be thinking about how do you become a better investor or a better analyst, better business person.
That's what we're trying to do. And that's the kind of content that we're trying to deliver to our crowd. All right. We're going to go over Taiwan Semiconductor. So a quick what's the business. So this is a manufacturer, manufacturing of semiconductors and it is an outsourced manufacturer. So this helps people like Nvidia, people like Apple do the manufacturing of their chips.
But you know Taiwan Semiconductor does not then compete with their customers. So what does this mean? So they have this manufacturing facility, they're an outsourced manufacturer. So they had the fabrication facilities. Many of those are in Taiwan. And there's the geopolitical concern around that. But they're moving some of those to the states, and some of those are being built right here in America, in Arizona, for example.
So that's that transition of moving, some of that manufacturing from Taiwan to the US and Japan, is happening is underway. And they produce for many people. So any anyone that doesn't have their own fab. So Intel would be really the only other big competitor that makes their own chips that has their own fab. Taiwan Semiconductor is, you know, has clients across the board Nvidia, Apple, Microsoft, any anybody that, needs chips made, Tesla, you know, they can be potentially being built at Taiwan Semiconductor.
Now, one of the things I'll mention about Tesla, you know, they're building this TeraFab. And I think that's going to be a very interesting thing to watch. And so if you look at who has manufacturing capabilities, certainly at the car level, and Optimus robot that's coming, Tesla has manufacturing expertise there. And now they're going to be deploying manufacturing expertise in the fab world for semiconductors.
So is a student of the industry. I think it's important to watch what Tesla is doing, watch what's happening with the Tera Fab. They just made some of these announcements that it's a partnership between Tesla space and xAI. So I think you should absolutely if you're interested in this in the space pun intended. Really check out what the TeraFab is and what it's doing.
They've made some preliminary announcements and there's things online that you can check out. But you know, back to Taiwan Semiconductor again, they outsource for this, for all of their clients and they don't compete with their clients. So I think this in the business model, when you talk about Taiwan Semiconductor, their business model is that they don't compete with their clients and so they don't make their own chips.
And so you don't see that. Now one of the things and this is that about Arm. But arm is now building their own chips. And so Arm has architecture that they allow people to use. And that has been the business model. But now they have started to get into the manufacturing of their own chips or producing of their own chips, not the manufacturing, but the production of their own chips.
And so there's a divergence there from what they had done in the past, or what they're doing now with having their own chips where you can kind of say, well, they could potentially be competing, with their customers. And so I think that's an important distinction. And I think it's important to think about when you think about the business model of Taiwan Semiconductor, that they're not competing with their clients.
And so Apple can send them their latest brand and not worry about, okay, well, is Taiwan Semiconductor gone hijacked some of this or are they going to you know, are they going to incorporate things that they maybe shouldn't. They don't have to worry about that. And not to say that these other people are going to do that, but certainly you take out that concern.
It's a very different set up. So let's get some stats on the company for the business. 1.75, a trillion market cap for Taiwan Semiconductor. So this is a very large company. And again lots of people use this company. All the big names that you would know about. All right. So now let's get into some of the revenue numbers here.
So if you think about what's happening on the business side, the revenue: 122 billion for the trailing 12 months, through December, and that is their fiscal year. So 2025 December. And where has that been over the past? So that grew 36% just over the last year was 90. In 2024 or 69, which is a 33% increase for that year.
And then, 75 in 2022. And so you go from 22 at 75, then to 69, then to 90, and then to 122. So pretty significant growth. And then the expected growth for next year also very high. So when you talk about what's happening in the AI boom, are these numbers going to be sustainable with a 2026 the end of this fiscal year
12/31 you're talking about 157 billion is the consensus estimate. That's nearly a 30% growth rate. That's 28.4%. And then if you think out 27 okay what's the number there. 195 billion. And that's a 24% from the 2026 numbers. So you're talking very significant growth rates. And really if you look back it's more than double just since 2022 for the 2027 numbers.
So these are very significant numbers. All right now let's talk about what's the gross margins here. So we talk about the gross margins for a lot of our companies. And you look at that over time. What's been happening. What's the gross margin for the 12/31/2025 number? Well that is 59%. So this is definitely in towards the elite category.
Especially for a manufacturing company, having these high gross margins is pretty significant. And obviously it means they have something called pricing power. Shout out to overlook. And Richard Lawrence, if you'd like to check out, somebody that has reviewed Taiwan Semiconductor, you can Google around and look for Overlook and Richard Lawrence. Shout out to him. Absolutely. I've learned personally a lot from Richard.
So thank you, Mr. Lawrence, for that and overlook, I think it's a fabulous operation, not investment advice. But I think they do a nice job. And if you look up some of the stuff online, I think, Mr. Lawrence has done an excellent job talking about the pricing power that Taiwan Semiconductor has because, the nature of their business, the nature of their business model, the fact that they stay on the very high end and they have the most advanced technology when it comes to building, chips in the, you know, the, the five, the four, the three, the two nanometer, all that stuff, you know, they're the leading edge of that.
And by the way, they don't just come up with a demonstration. They come up with manufacturing at scale at production. That is super significant. A big difference between building a prototype and and having really manufacturing at scale. And they can do that and they can do that, on pace with their clients. And so I think it's a huge benefit obviously, to their clients.
And so now let's let's look at the gross margin just quickly over time. So you talk about 2022. It's 59 again 54 in 23, 56 in 24. And we mentioned about 60 here in the 2025 numbers. So really steady really high gross margins over time. So very good. They're very consistent. And again leads to something to think about, okay, well how can they have these sustained high gross margins in a manufacturing business.
Well, they must have pricing power and they absolutely do. All right. So now let's talk about what's happening on the net income line. So $55 billion. And what's the gross margin for 2025. Well, that is a 45% net margin. So that is a fabulous net margin for a manufacturing company. How has that been over time? Well, if you look back in 22, that's 45%.
And at 38% now 40% up to 24 and then 45% again this year. So it's accelerating and it looks like it's going higher. So the expected net income for 2026 consensus number 73 billion. That would be 46%. And then 90 billion in 2027. Another 46%. So the consensus numbers are massive and really good. So all right, how would we rate this business?
The last thing we'll talk about before we get the rating is the free cash flow. So what kind of free cash flows a big manufacturing business like this produces. Well the 2025 number after investing $40 billion of CapEx. You're talking about 34 billion in free cash flow. So very good there. This is a fantastic business and projected, those numbers are projected to grow and CapEx projected to grow.
So not the 200 billion that Amazon is putting in, but 52 billion, this year for 2026 and expected 60 billion. Obviously, these are big operations, but still. And the 2026 expected free cash flow 43 billon and 60 billion, accordingly. So all right, when we talk about that okay. Well, the business rated very high, right. This is a fabulous business.
No concern here. Obviously, if you think about who is benefiting from this? These are fabulous gross margins, fabulous net margins, a business that's in demand, a great business model, pricing power, really, you know, coveted, clientele and customers who come back because they really appreciate them being on the cutting edge and have been, now the risk is okay.
They're moving their manufacturing, having it so concentrated in one location in Taiwan has been a concern. And they're moving some of that to a that's getting is some not all. However, I think they're absolutely making progress in the US and Japan there. So we'll see how that plays out I think important to pay attention to that.
That said, what's the score here? I'd still give it a nine. All right. On the business side, nine. Now currently, Doctor Che-Chia Wei is the CEO. And this business has been, you know, really a fabulous business, for a long time. And I think you got to give high praise to the management. We won't spend a lot of time here.
But it probably also giving the management a nine here. And so really fabulous management. If you look at the net and the gross margins and the way this business has been run, I think that is fantastic. And I think to give the management some credit, the capital allocation, if you think about them staying at the cutting edge and not losing focus on making sure that they don't compete with their clients, that they have the cutting edge technology and they keep investing for that.
And not, you know, not certainly not over investing, in my mind, but really making sure, that they're investing properly and that they have the most advanced set up for their clients. And customers, and they keep doing that. So, shout out, I think also a nine on the management. Now the price versus valuation. All right.
Now here, you could say okay, well what's the forward about 23 times. That's certainly not expensive. You know, but you know, and if you compare it to other competitors, you know, that's much lower. And obviously you're getting maybe some discount because of the geopolitical risk. But the location concentration for the manufacturing piece, but you're not overpaying.
At this point. Dividend yield of 1.13%, if you want to think about that is incorporated into you're getting some of the cash out of the business and the capital allocation connected to the management there. But on the forward PE certainly not overpaying, but okay, well, factoring in the risk here, maybe well we'll think this a little bit and it's probably not a nine on the valuation.
But you know between the seven and an eight on the valuation. So now we're quickly moving through the the components here. But I think it's worth mentioning, now the balance sheet and I'm going to come back to the business a little bit before we finish up everything. Alright. So coming back coming back to the business in a moment and going with the balance sheet right now.
So if you talk about the balance sheet all right what do we got? We got 97 billion. This is through 12/31/2025. And the cash is at 97 billion, 33 billion, in debt. So your net cash position, let's say 60 plus million here. 60 plus billion. Excuse me. So you're sleeping like a baby at night.
Nobody's worried about this. And if you're thinking about, okay, well, you know, is there anything we should be really concerned about? Not really. I mean, but I don't think, you know, you have the big CapEx numbers, but you still get the free cash flow, so you're not really worried about that. And I think for the most part, this is a balance sheet that, again, you can sleep like a baby at night.
So I think this is a nine. All right. Now I want to come back to the business. So what we've rated so far, we have the business as a nine. We have management as a nine, and then we have the price versus valuation. You could say 7 or 8 in the balance sheet, at a nine. So, you know, all in all you could shift some of these scores around, but you're still looking at a company that's overall an eight and a half.
It's certainly a solid eight for the composite score. But now I want to go back to the business a little bit. And so some of the people are concerned about what's happening on the business side. First. But let's tackle some of the geopolitical risks. Of course, there's a lot there's a lot happening around the world. And right now the focus is really in the Middle East at the moment.
Now, some people are using that as okay. Is this a proxy for other things that could happen in the world? And should we be concerned? I think you always have to pay attention to what's happening. And you've got to think about what's the risk management here. But when you're thinking about the business, I think again, and this is why I want to emphasize back to the business, pay attention to what is happening on the TeraFab for Tesla, spaceX and xAI, I think it's important to pay attention on what progress that they're making.
And then I'll give you sort of a strength of the manufacturing business for Taiwan Semiconductor. And I suspect that that will be very strong. But I think, Tesla will be a formidable manufacturer. They already are in, in other areas. That said, I think it's also important to watch what's happening with the transition and how much of the production and operation is getting moved out of Taiwan and how much as a percent it's getting produced in other places, like the like in Japan and like in the US, and additionally paying close attention to what's happening with what is the highest end piece of that manufacturing.
And so right now, the highest end pieces still remain. So the most advanced technology still remains in Taiwan. And I think it's very challenging when you build a system like that, when you build such, you know, historically a great system within Taiwan. And having that manufacturing base there, I think it's super challenging to just say, well, you're going to replicate that in Japan, you're going to replicate that in the US in a very short period of time.
So I, I do think that's a challenge. Now, I do think that seems to be happening though. And I think over time you're going to see that manufacturing prowess be exported to Japan, being exported to the US, to the US. But I do think, you know, it doesn't happen in six months. It doesn't happen in a year. But can it happen over 3 to 5 years?
Absolutely. For sure. And then if you're thinking about the business from a geopolitical risk that starts to dampen that geopolitical risk. And so, you know, it's hard to be above a nine. Obviously there's only one spot to go to a ten. But you can maybe you rate the business down a little bit lower. Because of that. Maybe it's not a nine, maybe it's an eight.
And again, but the composite score you could shift around, but you could absolutely say this is somewhere between, an eight, eight and a half overall for the composite score, depending on where you want to put the business, and certainly depending on where you want to put the valuation. I think management is an absolute nine. And I think the balance sheet is a nine, possibly a ten.
When you talk about the free cash flow in the business, the the, you know, the CapEx, budgets being very reasonable and certainly being able to handle the CapEx budgets and have, free cash flow from here. Just as a reminder, when we talk about that, you're talking about for 2025, you know, the CapEx budget is 40 billion, almost 41 billion for the 2025 fiscal year.
Again 12/31. 52 expected in 20 for the full year this year, almost 53, and then about 60 billion in 27. And each year you still have significant free cash flow, 34 billion in 2025. That's in the books. expected 43 billion in 2026, and then expected 60 billion in free cash flow in 2027. So you know, obviously these are big numbers and it's a manufacturing business.
But when you still have very good free cash flow, it's not a huge concern. And if you look at it's kind of balanced. And so this year they're going to put 40 or excuse me 2025. They put in 40 for CapEx in 34, nearly 35 billion in free cash flow. And then in 2026 for the full year expected this year through 12/31, you're expecting 52 billion, in CapEx.
Yeah, nearly 53 and 43 billion, in, free cash flow, expect expected. And then it's more even more balance in 2027 where you expecting 60 billion. So the numbers are going up there but then expecting about 60 billion in free cash flow. So really not a concern on that front. But again re emphasizing understanding the business here.
So again shout out to overlook and the work that Richard Lawrence has been doing over the years. He's been a long term shareholder of Taiwan Semiconductor. So praise goes to him for being onto this idea earlier. I think it's worth spending time as an investor, as a business person, as an analyst, to really understanding pricing power. We've talked about that before, and I think Taiwan Semiconductor is definitely an example of that.
Now, I think some of that's built into their business model thinking about, okay, well why does why do they have a good business model and why can they have these high, gross margins and high net margins being a manufacturing company? Well, I think it has to do some of their business model, their their business model. And obviously on the execution, everything is execution.
We can all have good ideas, but if you can't execute, it really doesn't mean anything. And so I think that's super important. So when you're thinking about Taiwan Semiconductor, I encourage you, if you're going to do analysis on this, remember, not investment advice, educational entertainment purposes only, it's important to think about, well, how can they produce such high net and gross margins on a manufacturing business?
Well, their business model not competing with their customers, reinvesting in making sure they're staying on the cutting edge and delivering the best products for their clients and then not competing with them. I think that's super important. And then making sure that you never, ever, let your foot off the accelerator. And so far they have not. And so I think it's important to think about that.
And there's lots of stuff you can learn about the history, of the way that they started. And I think Morris Chang is the person who started this business when I think he was about 57. So very interesting past there. If you want to spend some time, we've mentioned that, in prior episodes, but really foundational, to their success is this idea that they took and said, hey, we're going to be the manufacturing arm for all of these fantastic companies.
They did it at the right time. They came up with a fantastic business model. They haven't changed that business model. They continue to not compete with their customers. Their customers then rely on them to do this manufacturing. Obviously, Nvidia being one of the most notable app. On Apple being another very notable client here. And when you have these fantastic clients and you're not competing with them, they're likely to keep coming back.
You know, why would Apple want to start manufacturing their chips? Why would Nvidia want to start manufacturing their chips if they have a great partnership with Taiwan Semiconductor? And, you know, they feel like they're getting a good deal, they're getting what they need out of this, and they can then focus on their business. So, you know, Apple obviously, you know, designing their products and Nvidia the same thing.
And also them staying on the cutting edge to make sure that they're delivering for their clients. And so look at this self-similarity, you know piece of fractal geometry here. If you look at this self-similarity, you know, this these two components fit nicely together. So, you know, can they lose some clients? Can you have some additional competition? Again, I think it's important to pay attention to what's happening in the TeraFab.
That said, I think, again, fabulous business. Keep paying attention to what's happening. The geopolitical risk is something real. And I think it's important, to pay attention to follow that. But again, business still getting a nine management nine price free versus valuation. We can even say, you know, seven eight there nine on on the overall, balance sheet.
And then that kind of that gives you basically, depending on where you want to put some of those, you can push them up or down a little bit, especially on the price versus valuation. That gives you and you could do it a little bit on the business because of geopolitical. But you're a solid eight and a half, let's say, for the composite score overall.
So very good here. You know, what are the things to watch? Watch the geopolitical risk making sure that they stick with their business model, making sure that they stick, with staying on the leading edge, make sure the management is allocating capital properly and reinvesting in the business, making sure they have free cash flow and obviously, can they get that manufacturing prowess out to Japan, out to the US at the highest, you know, and, you know, end of the spectrum for the tech.
I think you have to watch for that. But overall very good. Again not investment advice. But in our portfolio, our students will be pitching at the end of this semester. We're really excited to hear what they have to say. And maybe some of it will be about TSM by looking forward to that. And we look forward to seeing you on the next episode of Market News with Rodney Lake.
Thank you very much.