The volatile technology sector has been a wild card this year. Tech stocks remain under pressure from the Facebook (NSDQ: FB) privacy scandal, which poses troublesome implications for Silicon Valley.

But technology already is bouncing back and faces several tailwinds. I examine these positives, with the spotlight on one of the strongest members of the BTP portfolio: Taiwan Semiconductor Manufacturing (NYSE: TSM).

The prospects for TSM this year and beyond are emblematic of why you should stick with the innovators in our portfolio, despite the tech sector’s choppiness so far in 2018.

Facebook CEO Mark Zuckerberg appeared before the U.S. Senate and House for two days of questioning on April 10-11. The business model of not just Facebook but other tech giants, such as Alphabet’s (NSDQ: GOOG) Google, could get threatened by stricter regulation. (For my latest views on BTP portfolio holding Alphabet, see my April 6 portfolio update.)

Zuckerberg’s much-anticipated appearance before Congress, to answer questions over the Cambridge Analytica data privacy scandal, turned out to be something of a farce.

The 33-year-old billionaire emerged unscathed during his testimony, largely because lawmakers from both parties revealed their ignorance of how the Internet actually works. Facebook shares have since rebounded, after posting steep declines.

Meanwhile, first-quarter corporate earnings are pouring in and the technology sector is expected to post a strong quarter.

According to research firm FactSet, the number of companies issuing positive earnings guidance in the technology sector for the first quarter is 26, far exceeding the five-year average of 11 for the sector.

For technology firms, the momentum from robust earnings should mitigate damage from reports of privacy breaches.

As the second quarter gets underway, the tech sector faces several other advantages. The new U.S. tax bill makes it easier for tech firms to repatriate cash parked overseas. They’ll use this cash to fund internal innovation.

Historically, a company’s research and development (R&D) expenditures are positively correlated with its stock performance. With these positive elements as a backdrop, the five FAANG stocks have been resurgent after getting a serious drubbing earlier this year.

You should ignore the dreariness of contemporary politics and focus on the favorable fundamentals. Which brings me to TSM.

Chipping Away at Intel

After 30 years at the helm of TSM, company founder Dr. Morris Chang is getting ready to step down in June. TSM is the largest company on the thriving island of Taiwan; Chang’s retirement has been big news in Taiwanese media. Chang isn’t known to most Americans, but he’s a celebrity back home and among the technological cognoscenti.

When picking a company for our portfolio, one of the factors I scrutinize is the quality of its management. Chang is a legend who built TSM into a powerhouse. I’m reassured that he’s handing control of the firm over to the existing co-CEOs, C.C. Wei and Mark Liu. Both are savvy veterans. Wei will become sole CEO and Liu chairman.

This month, TSM started to ship new semiconductor chips embedded with its most advanced technology. These chips surpass in sophistication and speed anything made by TSM’s arch rival, U.S.-based Intel (NSDQ: INTC).

Intel and TSM are competitors but they’re actually based on different business models. Intel is what’s called an integrated device manufacturer (IDM). The Silicon Valley giant both designs and makes chips. But TSM is what’s known as a “foundry,” making chips for designers without factories (aka “fabs,” hence the term fabless).

TSM is world’s largest dedicated foundry for fabless firms such Apple (NSDQ: AAPL), Qualcomm (NSDQ: QCOM), and BTP portfolio holding NVIDIA (NSDQ: NVDA). Intel is the world’s leading IDM.

Fabs are extremely expensive to set-up and operate; the costs run into the tens of billions of dollars. The visionary Chang pioneered the fabless business model, which TSM now dominates.

TSM has consistently provided the foundry industry’s leading technologies, making it indispensable to its clients. TSM last year commanded 56% of the foundry market.

Absolutely Fab

Intel is in the vanguard of cramming ever-greater computing power onto its chips. “Moore’s law” posited the theory that computing power doubles every two years at the same cost. Intel made this theory a reality, by shrinking the width of the channels (aka “nodes”) carved into silicon chips. The slimmer the node, the greater the capacity for computing power.

Intel’s most advanced chips currently feature a ten-nanometre (billionth of a metre) node. But TSM’s new chips, which started shipping this month, boast a seven-nanometre node. Therein lies TSM’s future competitive advantage over not just Intel but all rivals.

In addition to quality management, I also look for companies that spend consistently healthy sums on R&D. By 2017, TSM was plowing about $3 billion a year into R&D, which comes to about 8% of revenue. Indeed, TSM spends more on node technology than Intel and Samsung Electronics (OTC: SSNLF), another IDM, combined.

Samsung, Intel and TSM are the world’s three leading chipmakers, in that order. Their respective market capitalizations and annual revenues are close in magnitude; they tend to swap places in the ranking. In early 2018, Samsung surpassed Intel as number one by revenue.

Intel is best known for making computer processors; Samsung’s forte is smartphone chips. One of the beauties of TSM’s business model is that it serves both types of customers. TSM is now targeting the booming market for crypto-currency mining.

Ignore the unnecessarily gloomy forecasts for chipmakers. TSM occupies an industry sweet spot and it’s poised for market-beating gains. TSM is a buy up to $50.

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.