It’s hard to get a handle on exactly how big the market called the Internet of Things will be. Bain Capital sats $520 billion by 2021. McKensey, another consulting company, says $11 trillion by 2021.
The huge difference is a result of 1) what these consultant’s define as the Internet of Things–Ring doorbells, certainly, but Internet-connected automobiles, probably but how much of the value of a $40,000 car gets added to the Internet of Things ledger–and 2) whether the consultant in question is trying measure of value of the Internet of Things devices and chip themselves (as Bain tries to do) or whether, as McKinsey seems to be doing, calculating the value of anything “impacted” by the Internet of Things. One school of measure might count the value of chips and network technology of chips implanted in clothes to tell you when and how they need to be cleaned and another school might include the chips, the networks, and the value of the clothes (and of clothing companies) in the figure.
At this point, my conclusion, after trying to pull apart the figures, is that the total is “A lot. A big number.”
And I think that you want to expose your portfolio to the trend.
My choice is Taiwan Semiconductor Manufacturing (TSM), the biggest contract chip manufacturer in the world. I simply don’t know at this stage of the development of the Internet of Things what devices will be winners (or losers), what uses of the technology will add significant value to the sales total of an existing company (and which will be rounding errors to the company’s sales total and hence unlikely to move a stock), and how the Internet of Things will net out for a specific company (that is, will the Internet of Things be a net plus for sales or empower competitors to seize market share.)
What I do know without any doubt is that the Internet of things will require lots and lots of chips, most of which will come from an independent foundry such as Taiwan Semiconductor. The market for the Internet of Things will be looking to for more powerful, smaller, and more energy efficiency. Those demands will push the companies that design these chips to come up with new designs that require advances in manufacturing technology. And Taiwan Semiconductor is one of a handful of chip foundries in the world with the intellectual property–and the ash flow–to meet the demands of chip makers.
Taiwan Semiconductor doesn’t have the field to itself but most of the other big chip makers, such as Samsung, dedicate a considerable amount of their production to their own products. And as Apple (AAPL) has discovered, that dynamic can make companies that use Samsung to manufacturer their chips nervous about conflicts of interest. There are also new foundries on the horizon, such as startup GlobalFoundries. (Taiwan Semiconductor and GlobalFoundries are currently involved in suits and countersuits over patents for manufacturing processes designed to pack more transistors on a chip.)
The action in sectors such as 5G, the Internet of Things, and smartphones is pushing the demand for chips produced with 7-nanometer and 5-nanometer processes. That demand is growing fast enough and looks solid enough so that management at Taiwan Semiconductor is projected to raise capital spending–most of which goes to buy new and more equipment–by about $1.5 billion for the coming year. The bulk of that spending will go to the new 7-nanometer and the next generation 5 nanometer processes. Taiwan Semiconductor is expected to be the first chipmaker in the world to offer 5 nanometer technology in the first quarter of 2020.
In my first five picks for to subscribers to my JubakAM.com site in Special Report 10 Long-term Picks for a Short-term Market I focused on spending on research & development as an indicator for how long a company’s growth path might be. (The longer the growth path the less important to your gains short-term market volatility will be, I argued.) For Taiwan Semiconductor, however, I think you need a manufacture a somewhat more complex indicator composed of capital spending (since that’s an indictor of the company’s willingness to buy new equipment), internal R&D (about 9.9% of revenue in the trailing 12 months, and external R&D, which is what I call R&D spending by the equipment makers that Taiwan Semiconductor buys its chip manufacturing equipment from. At a big equipment maker such as Applied Materials (AMAT) R&D spending was 13.9% of revenue in the last 12 months.
(I also find it reassuring that Taiwan Semiconductor pays a 3.44% dividend because that indicates that the company is looking to use its cash wisely as opposed to just spending it on capital equipment.)
Taiwan Semiconductor is due to report earnings on October 17. At 2:30 p.m. New York time on October 7, the ADRs were trading at $47.94.
As of October 7, I’m adding the shares of my long-term 50 Stocks Portfolio.