What did Buffett see in TSMC with US$4.1 bln stock purchase?

Judy Lin, DIGITIMES Asia, Taipei 0


For the first time in his 91 years of life, US billionaire Warren Buffett has recently invested in a semiconductor stock. It is not any of the American semiconductor companies, but TSMC, a company on which many may want to reduce their reliance because Taiwan is the "most dangerous place on earth." What did Buffett see in TSMC to make this investment decision?

According to Berkshire Hathaway's regulatory filing for its equity investments in the third quarter, it spent more than US$4.1 billion buying 60.1 million shares of TSMC's American deposit receipt (ADR).

"When Buffett makes a move, he might have monitored the financial performance and the fundamentals of his target for more than 10 years. That is exactly the case with his investment in Apple," said Nobunaga Chai, special research consultant at the Photonics Industry & Technology Development Association (PIDA). Chai has worked as a senior semiconductor analyst in equity investment companies and independent research institutes.

Chai went on to say, "As a value investing guru, Warren Buffett only picks the companies with optimistic long-term prospects, sound financial health and profitability, and relatively low price-earning (PE) and price-to-book (PB) ratios, and TSMC passed all of the tests when its stock prices fell through the floors in Q3."

Berkshire Hathaway sold BYD before purchasing TSMC, while Apple remains the largest tech investment that Buffett made in Berkshire's US$362 billion equity portfolio, according to Reuters.

As Buffett has been famous for his patience to make long-term and "snowballing" investments, does he not worry about the geopolitical risks where some say China is going to invade Taiwan and take over TSMC in this decade?

"Obviously, Buffett won't do the investment if he sees that scenario to take place in at least 20 years," said Chai.

Although many analysts interpreted Berkshire's decision to sell BYD and buy TSMC as a signal that Buffett sees better prospects in semiconductors than electrical vehicles (EV), Chai said it may not be necessarily so. "Valuation is the first rule of the game for value investing people. Buffett would not buy TSMC when its stock prices were too expensive, and he sold BYD perhaps because the EV and battery maker's stock prices have exceeded reasonable valuation."

The fact that TSMC has been issuing stable cash dividends over the past 20 years and has maintained robust growth momentum despite the current cyclical downturn in the tech industries, may also have been the reasons that triggered Buffett's decision to buy the stock.

Of course, Buffett is not always right about his investment decisions. His investment in IBM did not pan out, but his faith in Apple has been proven right, which is relatively strong in performance so far during the severe downcycle currently experienced by other smartphone and notebook companies.

TSMC reported stellar performance for its third-quarter 2022 earnings, with a gross margin of 60.4%, operating margin of 50.6%, and net profit margin of 45.8% - results very few hardware manufacturers can achieve. "Very rarely does a company have all of the three pillars of competitive edge, namely - process technology, client structure, and ecosystem. But TSMC got them all," said DIGITIMES chairman and president Colley Hwang, at the US-Taiwan High-tech Forum (UTHF) co-organized by the North American Taiwanese Engineering and Science Association (NATEA) and DIGITIMES at Silicon Valley recently.

"Our third quarter business was supported by strong demand for our industry-leading 5nm technologies," said Wendell Huang, VP and chief financial officer of TSMC during the third-quarter 2022 earnings conference call. "Moving into the fourth quarter 2022, we expect our business to be flattish, as the end market demand weakens, and customers' ongoing inventory adjustment is balanced by continued ramp-up for our industry-leading 5nm technologies."

TSMC has warned that the biggest inventory adjustment of the industry will take place in the first half of 2023. Chances are Buffett must have taken that into consideration.