One of the most important Apple (AAPL 0.20%) suppliers is Taiwan Semiconductor Manufacturing Company (TSM -2.03%), or TSMC for short. The company handles the task of manufacturing Apple's A-series chips -- the brains of Apple's iPhone, iPad, and Apple TV product lines -- and also manufactures many of the chips that Apple buys from third-party suppliers, as well.
Apple is an important client of TSMC's as well, as the latter buys substantial quantities of chips produced on TSMC's most advanced -- and priciest -- technologies.
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Apple is and should continue to be a large and important part of TSMC's business for the foreseeable future. Here are some of the long-term growth opportunities for TSMC that investors should keep an eye on.
1. 5G wireless
The wireless industry looks set to begin transitioning to 5G wireless technology this year, with adoption picking up in the years ahead. During TSMC's most recent earnings call, CEO C. C. Wei explained that 5G is one of the "megatrends that will drive the future semiconductor growth."
Later on during the call, Wei elaborated on that opportunity. First, he indicated that future smartphones with 5G capability will also be endowed with capabilities like artificial intelligence and technology to facilitate augmented reality (AR) and virtual reality (VR).
Second, the executive explained that as smartphones move from 4G to 5G, the complexity of the types of radio frequency (RF) chips used in newer smartphones will go up. The potential benefit to TSMC, Wei explained, is that this complexity will require that these RF chips be larger, ultimately meaning that each smartphone sold will incorporate more silicon.
"So that means there's a lot of increase in that revenue, it's because of silicon content, in terms of the smartphone business," said Wei.
2. Artificial intelligence
The second of the "megatrends" that Wei cited is artificial intelligence (AI). If you follow tech, you're probably intimately aware that the buzz around AI is palpable these days.
TSMC stands to benefit from AI because many of the companies that build the chips for AI tasks don't generally own their own chip manufacturing capabilities and instead need to lean on third parties like TSMC. Moreover, since AI chips are products ultimately defined by their performance, AI chip developers are more likely to want to use the best -- and, ultimately, most expensive -- manufacturing technologies that companies like TSMC have to offer.
These AI chip developers can range from the one of the many AI chip start-ups trying to make their mark on the industry to giant companies that want to build their own proprietary AI chips for use in their own infrastructure.
It's not obvious what the long-term opportunity for AI will be for TSMC, but I imagine that it'll be significant and that TSMC will be a major beneficiary of that market.
3. Internet of Things
Another area that could prove to be a solid long-term growth opportunity for TSMC is the broad market for Internet of Things (IoT) chips. To be clear, IoT doesn't make up a huge percentage of TSMC's revenue today; C. C. Wei explained on the company's most recent earnings call that such chips were good for just 6% of TSMC's 2018 revenue.
On the bright side, Wei said that its IoT revenue should grow at a "double-digit" pace in 2019, compared to slight growth in smartphones and slight growth in high-performance computing (HPC) applications -- excluding, of course, cryptocurrency mining, which is set to drop.
The IoT market isn't going to drive massive top-line growth for TSMC or have a large influence on the company's stock price, but it could be a relatively fast, consistent grower that, over time, adds meaningfully to the company's revenues and profits.
Investor takeaway
TSMC's customer base is so broad and its market position so strong that the company might be a solid means for investors to gain broad exposure to the overall semiconductor industry. Indeed, while TSMC's execution is critical to the company's business success, the company's business performance is also highly influenced by overall market and industry trends.
Although it might be tempting to think of TSMC and, say, a broad semiconductor index fund as being interchangeable, it's worth noting that TSMC has often outgrown the overall industry. Indeed, even for 2019 -- which isn't shaping up to be a huge growth year for the company -- the company forecasts slight growth against a flat foundry market and just 1% semiconductor industry growth, excluding the memory market.
So, investors that think that TSMC can continue outperforming the industry might want to give the contract chip manufacturing giant a look as a way of making a bet on the chip industry.
