Taiwan Semiconductor's (TSM, Financial) revenues grew 31% in 2020, outpacing the rest of the foundry industry by 5x.The company's impressive growth was driven by its continued dominance in leading edge chip production. Initially, the COVID outbreak caused management to lower revenue guidance for the year. However, the pandemic increased demands for high-performance computing, and consequently, demand for TSM's services and capacity ended the year higher than pre-pandemic levels. Adding to its 2020 tailwind, several ofTSM's largest smartphone customers stockpiled chips in connection with the trade restrictions imposed upon Huawei.
As the process for producing semiconductors has grown more complex and expensive, technology companies have increasingly outsourced production. TSM has been a great beneficiary of this trend. The company has emerged as the dominant survivor in the foundry industry, with most competitors having given up on producing at the leading edge. In fact, even Intel, whose manufacturing prowess long led the industry, has fallen behind TSM and is now considering increasing outsourced production in the coming years.
Sequoia came into 2020 with a small investment in TSM but took advantage of the volatility in the company's stock price in the spring to add to its investment below $52 per share. Despite TSM's strong performance in 2020, we believe the company's shares continue to trade at a reasonable earnings multiple as compared to our future expectations for the business.
From Ruane Cunniff (Trades, Portfolio)'s Sequoia Fund 2020 annual report.
