Taiwan Semiconductor - today's pullback a buying opportunity?

Taiwan Semiconductor (TSM) fell over 4% today, more or less in sympathy with the drop in large-cap semiconductor stocks instigated by the poor showings of Texas Instruments (TI) and SanDisk (SNDK).

There may indeed be some near-term pressure on TSM but looking longer term, the company is benefiting, and in the future will increasingly benefit, from the "go fabless" trend in the semiconductor industry.

What "going fabless" means is that a semiconductor company outsources the manufacturing of the physical chips while maintaining the intellectual property of the chip designs in house.

This approach has two major benefits:

1. Paying for a semiconductor foundry is not necessary. This can save the semiconductor company several billion dollars in capital investment.
2. Since a foundry does not need to be built from scratch, the semiconductor company enjoys faster time to market.

These benefits can be useful to mature companies but in these days can be crucial for a semiconductor start-up.

As the biggest of the companies engaged in providing outsourcing services to the semiconductor industry, including selling critical foundry capacity, TSM is well positioned to benefit from the trend described above.

At current levels, the stock is not particularly expensive. It has a PEG of only 0.79 and a PE under 14, quite reasonable for a tech stock. With a $50B market cap, this is a solid company that maintains a strong position in its industry. Management continues to declare that the company will meet consensus analyst expectations despite the turmoil in the markets. TSM has just finished buying back about 1% of outstanding shares and will be buying back another 1% during 2008.

The chart is a bit of a mess and it looks like the stock is on the way down to about $9. Given TSM's potential, that wouldn't be a bad entry point.

Disclosure: none