Why Did Buffett Buy TSMC Stock?

Why Did Buffett Buy TSMC Stock? Semiconductors underpin a vast array of consumer and commercial products, from mobile phones and laptops to integrated circuits and quantum computers.

They have also revolutionized critical services such as medical care and diagnostics, with microchip-based devices such as pacemakers and MRI scanners becoming increasingly commonplace.

Moreover, for countries like the United States, the technology is critical for maintaining global competitiveness in engineering and manufacturing.
American companies are at the forefront of developing new techniques for making smaller, more powerful components, and this experience has given them a significant advantage in an increasingly distributed worldwide marketplace.

One investor who’s always insisted on backing homegrown ingenuity is Wall Street legend Warren Buffett. In fact, the Oracle of Omaha is so convinced of his fellow countryman’s abilities to innovate their way out of a fix that he’s never been shy of putting his money where his mouth is.
Indeed, Buffett’s trading vehicle, Berkshire Hathaway, has substantial holdings in many quintessentially American brands, and these investments have proved extremely lucrative over the years.
Therefore, considering Buffett’s propensity to back the red, white and blue of “Old Glory,” it’s noteworthy when the investment guru appears to go off-piste in his stock picks.
Consequently, as news broke that Berkshire Hathaway had opened a $4.1 billion position in the Taiwan Semiconductor Manufacturing Company, many industry watchers were left somewhat bemused.
Given the uncertainty surrounding the geopolitical situation in the region – not to mention the severe headwinds the chip-making sector has had to deal with recently – is it fair to question whether Buffett’s really made the right call in buying TSM?
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What Does Taiwan Semiconductor Do?

Although Samsung earns more revenue, the Hsinchu-based chipmaker’s market cap of $430 billion establishes it as the world’s largest manufacturer of advanced semiconductors.
Indeed, the business produces chips for fabless companies like Apple, Nvidia and Qualcomm, while other enterprises that make their own microprocessors – such as Intel and Texas Instruments – also outsource a portion of their operations to TSM too.
With a roster of clients encompassing some of the most prestigious and cash-rich firms on the planet, it’s no surprise that Taiwan Semiconductor’s financial health is in the shape it is. For example, TSM’s net revenue was up 35.9% in the third quarter, while its gross margin expanded by +9.1 ppts. Furthermore, TSM has a strong balance sheet, with total current liabilities in September just a little over 50% of its cash and cash equivalents.
The company also enjoys a 56% share of the global foundry market, making it the most important pure-play manufacturer in the world. The next largest, Samsung, came in at a distant 13%, showing how dominant TSM actually is in the space.
That said, the semiconductor business is an arms race of sorts – and TSM has a lot of competition.
However, the firm currently has a lead over many of its rivals when it comes to feature size. Feature size is a crucial measurement denoting how many calculations a microchip can process, and, in a world where smaller is better, Taiwan’s 3nm offering is the best in class. For comparison, Intel’s 7nm chip is expected to arrive in 2023 – and only then with TSM’s help.

Has Buffett Made A Rare Miscalculation?

TSM seems to tick a lot of the boxes that Buffett looks for in a company.
For example, in addition to the ongoing investment in research and development needed to stay competitive, the industry has high barriers to entry due to the onerous start-up costs involved in opening a new plant. As a result, the chip fabrication space is dominated by just a few large firms that can afford these astronomical expenses.
However, an investment in the Taiwan Semiconductor Manufacturing Company comes with some very pointed risks. The most pressing of these is the threat of armed conflict on the island, as the government of the People’s Republic of China (PRC) has repeatedly reiterated its desire to bring the territory into its fold.
Interestingly, Buffett could be taking an idiosyncratic view of TSM. Ignoring the apparent war overtures as a distraction, he might view Taiwan Semiconductor as a defensive play against the ongoing trade war between the United States and China.
Indeed, if tensions continue to escalate, Chinese companies may be cut off from accessing American-aligned chipmaking technology firms. This would be a major problem for the PRC, as TSM controls the majority of the global market for foundry services.
Thus, owning shares in Taiwan Semiconductor would expose Buffett to a market with growing demand but severe supply-side constraints. This would no doubt be a scenario that would reap rich profits in a very short space of time.

Why Did Buffett Buy TSMC Stock: The Final Word

Demand for semiconductors is expected to explode over the next few years, driven by the continued growth of smartphones, high-performance computing, and the Internet of Things. In addition, the rollout of advanced driver assistance systems (ADAS) and autonomous vehicles is also expected to generate a compelling need for semiconductor chips too.
However, leading chipmakers are struggling to meet this challenge due in part to a shortage of skilled workers and limited production capacity. The situation is only exacerbated by the fact that many leading foundries are running at full capacity and unable to expand production to meet rising orders.
Thus, Buffett’s entry into the microchip business looks perfectly timed. And, if you are a keen observer of the celebrated investor, you might just want to follow suit.

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