When we first graduated from college, my friend Matt and I found a respectable two bedroom apartment in a good location in Baltimore City. 
At the time, Matt was still dating this girl Julia from college. The two had lived together overseas in China for almost a year, and both decided during that time that their relationship wasn’t going to work.
Both Matt and Julia each expressed to me that one was going to break up with the other for almost six months straight. Yet for some reason, the two kept on dating.
I wondered for some time how these two could be unhappy with each other and still want to stay in the relationship. I wondered why, despite their public grievances, it took so long to follow through with what they said they wanted. And it wasn’t until they actually separated that I figured out what was holding them together.
I can sum it all up in one word – and no, that word is not love.
Instead, it was dependence holding these two together.
See, Matt didn’t decide to end things with Julia until he had a new prospect on the side. He needed to know that when he broke things off, he wouldn’t be alone. And though many would argue this is a cowardly way to go about ending a relationship, you can’t deny things played out exactly how Matt wanted.
The fact is, Matt makes a much better businessman than a boyfriend.
Nothing Personal
I tell you this story because it closely parallels the long-coming separation between two partners in the technology industry: Apple (NASDAQ: AAPL) and Samsung Electronics (KSE: 005930).
Apple has been pulling away from Samsung for some time now. The company has been cropping its dependence on Samsung display and flash memory components over the past several years. In addition to display and flash memory, Samsung has also provided Apple with processors for running its mobile operating system (iOS).
In an effort to break away from Samsung, Apple began planting the seeds in 2010 to build a relationship with another semiconductor manufacturer. Of course, Apple wasn’t technically cheating – this was just a budding friendship.
But we all know how that can end up. Fast-forward three years, and Apple has finally decided to make things official: the company is switching to Taiwan Semiconductor Manufacturing Co. (NYSE: TSM) for its mobile processing needs.
The reason for the three-year delay is that Apple has notoriously high quality control standards. Samsung produces some of the best components at the best prices. As much as Apple doesn’t want to feed its number one mobile competitor, product quality has always been a more important factor.
The fact that Apple is switching to TSM speaks volumes about the latter company’s ability to provide a high quality product. After all, Apple isn’t dropping Samsung on a whim – this is a calculated breakup still in progress. And even with this move, Samsung will still be Apple’s number one component provider.
Others will tell you this is all the result of bad blood from patent disputes, but that’s just because drama sells. The fact is, this is smart business and nothing more. TSM now offers 20 nanometer technology, while Samsung’s hardware is over 50 percent larger at 30 nanometers.
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Coming Out on Top
I’ve been saying this a lot lately, but it is worth saying again: Apple’s future depends on innovation that the company has lacked for some time now. The iPhone has been repackaged and resized (i.e. iPad and iPad-mini) with minimal changes for over half a decade.
Interestingly enough, June 29 marked the 6th anniversary of the iPhone, meaning it was 6 years ago when Steve Jobs told consumers that the iPhone is “literally five years ahead of any other mobile phone”. Considering the relative stagnation of the device, this would mean the iPhone is officially one year behind other mobile phones. And that’s coming from Steve Jobs himself…
That being said, a major TSM breakout will largely depend on Apple’s ability to innovate its current product lineup. However, there is still immediate upside to the stock right now surrounding these developments – TSM has seen a steady climb over the last five days in response:
This is what I suggest: buy TSM on the uptrend and hold on until whatever comes after the iPhone 6 (presumably the iPhone 7) is released. TSM might then become a sell or hold based on the quality of the device.
Here’s why: Michael Foulkes, Apple’s liaison to the U.S. government, recently let it slip that the iPhone 5s and iPhone 6 would be the last two approved by Steve Jobs. In other words, consumers can finally expect something notably different after the iPhone 6.
And I’m willing to bet this product will include a wraparound OLED screen based on a patent application recently filed by Apple. If I’m right, the Apple bears will go back into hibernation, and Apple’s valuation will rise again. Better yet, TSM shareholders will reap the benefits, riding securely on Apple’s coattails.
Turning progress to profits,
Jason Stutman
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