LTGG Reflections: TSMC, why now?

This happens of course. Sins of omission like Nike (researched in 2010 and again in 2015) and Starbucks (first met in 2007) or insufficient patience with previously held companies Apple (2010 to 2015) and Microsoft (2004 to 2006) have been far more valuable lessons for refining our philosophy and process than the sins of commission such as Beyond Meat, Vestas, or Ginkgo Bioworks. 

The challenge we face is that once a company’s share price has quintupled (the return hurdle for inclusion in LTGG portfolios), the odds of it doing so again are significantly reduced. In other words, investing early in outliers matters. Examples such as Amazon (2004), Tesla (2013) and NVIDIA (2016) come to mind.

That said, the odds of an outlier quintupling again are not zero. Indeed, the best might yet be to come.

Precedents here include Netflix, which had already increased five-fold in the four years between our first review of the company in 2011 and our initial purchase in 2015. Since then, however, it has generated a holding period return of approximately 15 times. Similarly, when we first purchased ASML in 2017, we berated ourselves for being decades late to the opportunity (it had delivered a share price return of approximately seven times since the inception of the LTGG strategy in 2004). However, since our ‘late’ purchase, it has delivered a further five to six times return at time of writing.

This leads us to our newest purchase for the portfolio: Taiwan Semiconductor Manufacturing Company (TSMC). So, what is it about this nearly 40-year-old company that informs our conviction that there is still plenty of potential upside from here? 

Hidden among the lush and green streets of Hsinchu Science Park, on Taiwan’s west coast, TSMC has built one of the world’s most important factories. The area is now often referred to as Taiwan’s Silicon Valley, as this tech-focused microcosm has prevailed as the centre of the semiconductor industry, which is so crucial to global supply chains. 

Semiconductors are everywhere, from mobile phones and laptops to washing machines and cars. The demand for these tiny yet extremely powerful components has been mounting as physical assets continue to digitise to become smarter and as our appetite for artificial intelligence grows.

TSMC’s impenetrable competitive advantage in a secular growth opportunity is apparent merely by virtue of it commanding 90 per cent of the production of the most advanced semiconductors. It is a key supplier to behemoths like NVIDIA and Apple. 

But such characteristics of the company have existed for decades, so why are we investing now?

Firstly, TSMC is a pure foundry, meaning it does not design its own semiconductors but instead focuses on manufacturing those of its customers, at unmatched efficiency. As a result, TSMC benefits from being agnostic to the source of semiconductor demand. This is particularly attractive at a time when it is not yet clear where the dust will settle on the AI arms race. 

Secondly, the company’s domicile means geopolitical risks are a key area of concern for the market. However, the work we have done with external experts has helped us form a view on what probabilities we should attach to various scenarios. It is also encouraging to see the company commit to diversifying its geographic footprint – it has recently announced it will allocate $100bn toward building five new US factories in coming years. Successfully replicating its manufacturing prowess overseas could be game-changing, both in terms of unlocking higher volumes and derisking our investment case.

Thirdly, while TSMC is new to the LTGG portfolio, it has been held in other Baillie Gifford portfolios since 1999. 26 years of ownership and over 100 pieces of internal research have afforded us in the LTGG team the opportunity to get to know this company deeply over the years. This has made it simpler for us to build our conviction in possible upside scenarios.

Lastly, while TSMC is undeniably a cyclical stock, there is an often underappreciated countercyclical appeal. Its total assets have increased every year since 2009, despite the inherent cyclicality of the industry in which it operates. All the while, it remains committed to research and development and capital expenditure. Together these comprise 40 percent of sales, as the company continues to reinvest in its future growth through the cycles. 

So, what could an upside scenario look like? We think it’s possible that AI presents a structural tailwind for chip demand, whereby the semiconductor market grows 15 per cent per annum to account for approximately 1.5 per cent of global GDP by 2035 (for context, the oil industry accounts for around 4 per cent today). This tailwind, coupled with TSMC’s lead in advanced packaging and constant innovation, at a high-teens market multiple, could translate into a quintupling of TSMC’s market capitalisation from the time of initial purchase to approximately $4tn by 2035.

Our task remains that of sowing the seeds of future growth and ergo returns. TSMC is an exceptional company and while it has already delivered outlier returns, we believe its odds of future success have increased. 

Annual past performance to 31 March each year (net%)

Annualised returns to 31 March 2025 (net%)

Source: Revolution, MSCI. US dollars. Returns have been calculated by reducing the gross return by the highest annual management fee for the composite. 1 year figures are not annualised.

Past performance is not a guide to future returns.

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