Berkshire Hathaway Inc.’s investment in Taiwan Semiconductor Manufacturing Co. (TSMC) allows investors to buy into a global chip industry during the dips. The reason for the recommendation is Warren Buffet.
His conglomerate bought $ 5 billion shares in TSMC last quarter when TSMC’s market capitalization was wiped out by more than $250 billion. Though Berkshire has not openly recommended buying the shares, market observers feel that TSMC’s cheap valuations, solid fundamentals, and technology were the reason for the purchase.
Tiger Global Management LLC also made a similar move suggesting that value is unfolding in the chip industry after the slowdown in the chip industry and the turbulent period between Indo-China tensions.
Value Stock
Many banks on wall street have reaffirmed but called on TSMC, with Morgan Stanley’s analysts saying it is a good entry point.
In Taiwan, TSMC’s shares jumped 10% after Berkshire’s investment was revealed last week. According to a note on November 8, Morgan Stanley said that valuations are at a 30% to 40% discount because of geopolitical risks.
TSMC shares are trading at a 12.6 Price Earnings ratio based on its next year’s earnings estimates as per Bloomberg data. As per Goldman Sachs’s estimate, it is at the lower end of the 10-year average.
TMSC is trading cheaper than most Philadelphia Stock Exchange Semiconductor Index stocks.
Cash Flow
Another advantage of TSMC is that the company has reported a double-digit sales growth and gross margin above 50% a year of slowdowns in the chip industry. This has helped to cap the stock to a 21% loss this year, outperforming peers like SK Hynic Inc. and Micron Technology Inc.
Analysts say that TSMC’s history of stable dividends since 2000 and respectable cash flow could be a reason for Warren Buffets’s interest. As per Bloomberg data, TSMC’s dividend yield of 2.6% is at par with SK Hynix and more than 0.8% given by Micron.
The shares of TSMC may continue to be volatile in the short term because of inventory adjustments in the industry and geopolitical risks, though Buffet’s bet will boost retail sentiments.
The US and China rift is mainly due to the semiconductor industry, as both tech giants want to be leaders in the global technology industry. The US has imposed sanctions on the high-end chips made for Chinese clients as they do not want the chips to fall into the Chinese military hands.
Analysts keeping in mind the risks, had cut the target price by 30% since February this year, with the shares declining by 30% in the US market and broadly aligned to the drop seen in the benchmark of global semiconductors stocks.
As per Jason Su, a fund manager handling Cathay Taiwan 5G plus Communications ETF, investors are worried about the inventory build-up. Companies, including TSMC, expect the inventory correction to continue past the first half of 2023. He added that chip stocks would rebound after the inventory correction was over.
