How to play the rush to supercomputing

It’s said that it was more profitable to be a pick and shovel salesman during the California Gold Rush than it was to be a gold digger. In the war of attrition for increasing computing power, Sanjay Ayer of WCM Investment Management identifies Taiwan Semiconductor (NYSE: TSM) as the modern-day pick and shovel.

As long as you think technology is going to become more important and chips are going to become more important, Taiwan Semiconductor will play an increasingly critical role in the world.

In this wire, Ayer explains the bull case for Taiwan Semiconductor and why the company might become one of the most important businesses in the world.

Edited transcript

Sanjay: We joke internally that Taiwan Semiconductors (NYSE: TSM) might be the most important company in the world today. In fact, it might be the only company that countries might go to war over.

So what is Taiwan Semiconductor? It's a company that manufactures semiconductor chips for companies like Nvidia, Qualcomm, various semiconductor companies who have outsourced manufacturing. At day one it was not a good business. It was capital intensive, there was lot of cyclicality to it. So people ask, "Why would you build a foundry, an outsourced manufacturer?"

What happened is over time, and we've seen this with other outsourcing companies, is as more customers are looking to focus on their core competency, cut costs, outsource as part of the value chain, you gain scale. As you gain scale, you can climb up the research and development value chain and do more and more for those customers, such that fast-forward to today, Taiwan Semiconductor is the leading cutting edge manufacturer. It's recently surpassed Intel, which if you asked anyone a decade ago, they would've said that's impossible to surpass Intel on cutting edge chip technology. So it's an incredibly important company.

For us, we like investing in areas like tech and healthcare, which tend to be perceived as volatile. We tend to look at it, how do we invest from a picks and shovels approach or an arms dealer, you might say. Rather than pick the individual chip company that's going to win, which is a difficult game to play over a long period of time, who is the company that's supplying to all those chip manufacturers? And so now Taiwan Semiconductor is making lots of waves in the industry, from desktops to laptops to mobile phones. Everyone is looking at AI and high-performance computing for the future. It doesn't really matter where the demand is. As long as you think technology is going to become more important and chips are going to become more important, Taiwan Semiconductor will play an increasingly critical role in the world.

Now, why I said ‘the most important company in the world’, there are geopolitical tensions obviously with the US and China specifically who are each want to in-house semiconductor expertise, and Taiwan Semiconductor the dominant player there. So it's becoming only more critical, which again, goes back to the notion of positive moat trajectory.

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