The artificial intelligence (AI) ecosystem includes many functional parts, from cloud providers to chip designers, hardware manufacturers, and more. Many companies are fighting on the same footing, increasing the need for companies to establish a competitive advantage.
But there’s one technology company that’s holding its own in the world of AI. taiwan semiconductor manufacturing (NYSE:TSM) —Also known as TSMC. It may not be the first company that comes to mind when you think of AI stocks, but it’s arguably one of the most important in the AI world.
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What makes TSMC better than other companies?
At a simple level, the goal of semiconductor manufacturers is to continually make chips smaller and more powerful. The strong part is simplicity, but the size aspect is also very important. This is because smaller chips make electronics more energy efficient and provide more computing power per unit of space.
TSMC’s main competitive advantage is its manufacturing capabilities. No other company can match us for manufacturing at this scale and precision. And it’s not something that can be recreated overnight or in a few years. It requires countless millions of dollars, specialized engineering talent, and years of development.
The company considers chips smaller than 7 nanometers (7nm) to be advanced. In the first quarter (Q1), 74% of TSMC’s revenue came from advanced chips. A quarter of its sales come from 3nm chips, and the company says it is expanding production of its 2nm chip family. Each time TSMC achieves a new milestone, its competitive advantage is strengthened.
How has TSMC’s capabilities paid off?
TSMC is in an advantageous position due to its differentiated capabilities. How about that? Nvidia, broadcom, alphabet, Amazonor whoever they are, they basically have to go to TSMC to manufacture the chips. Switching to a competitor means risking lower yields (the percentage of chips that work as intended) and lower performance.
According to TrendForce research, TSMC’s market share was 70.4% at the end of last year. The next closest competitor is samsung electronics7.1%. When you look at advanced AI chips, the gap widens considerably. TSMC manufactures virtually all of them.
As the only game in town, TSMC has been able to raise prices and improve profits and margins. Over the past three years alone, net income and operating income (cash from core operations) grew 206% and 216%, respectively, outpacing revenue growth.
