Warren Buffett’s impeccable track record in the stock market makes his ‘value investing’ stock picks worth paying attention to.
In recent weeks, he’s made another bold move. This $4bn foray into the tech sector has obvious upsides, but one thing in particular stands out to me as a reason to be bearish.
Berkshire Hathaway’s latest investment
The Taiwanese semiconductor manufacturing and design company Taiwan Semiconductor Manufacturing Company (NYSE: TSM) is the most recent newcomer to the Berkshire Hathaway portfolio.
The latest 13F filing reveals it makes up 1.3% of Buffett’s corporation’s holdings. That’s a $4bn total stake and its 10th largest holding. That means there are only nine other companies Buffett invests more into. So what did he see that he liked?
What caused Buffett to buy?
TSMC’s share price tumbled in 2022, losing over 50% of its value. Perhaps Buffett spotted a bargain? The price has recovered in recent weeks – possibly as a consequence of Buffett’s investment being made known – but it still trades over 40% down from its price earlier this year. So there’s still time for me to get in at a discount, in theory.
The company produces semiconductors. These little chips are a crucial part of modern electrical devices like smartphones, laptops and other electronics. They are also vital to important military and healthcare applications.
We saw how important semiconductor production was during the pandemic when an increase in demand for electronics caused a shortage. As a result, car manufacturers the world over had to stop production.
TSMC is the largest semiconductor manufacturer globally, with a total market capitalisation of around $400bn. The company is going from strength to strength, with revenue up 47% year-on-year and net income up 79% year-on-year. It has a healthy price-to-earnings ratio of around 14, too. It’s easy to see why Buffett saw an opportunity here, so what’s the problem?
The war in Ukraine
As Russia attempted to take back its former province of Ukraine, was its longtime ally China taking notes for its own planned capture of Taiwan?
It’s not only conquest that gives China a reason to take Taiwan. 65% of these vitally important semiconductors are produced in Taiwan alone. When we look at the advanced chips, that number goes up to 90%. This tiny island nation’s semiconductor production gives it huge strategic importance, and TSMC is at the heart of it. I wouldn’t like to be holding its stock in the event of a conflict.
What the USA is doing about it
History is too unpredictable for me to make stock choices by guessing the future of the world.
The key detail is that this bottleneck of semiconductor production in Taiwan is a problem – whether China invades or not.
And indeed, we’re seeing the result of that already. In August 2022, President Biden signed into law the CHIPS and Science Act. This legislation includes $52bn to strengthen semiconductor manufacturing in the United States.
While it’s anyone’s guess how things will pan out, the world has a strong incentive to move away from its reliance on Taiwanese semiconductor production. This makes TSMC a stock I’ll steer clear of for the time being.
