The Taiwan Semiconductor Manufacturing Company – TSMC – is the world’s largest maker of ultra-fast microchips that power cars, computers, phones and nearly every other part of modern life.
The potential additional demand for its products from artificial intelligence, electric vehicles and renewable energy operators is such that legendary investor Warren Buffett has taken shares worth £3.3billion .
It may be a small change for its £565bn Berkshire Hathaway fund. But is it still a message that TSMC – dubbed “the technology catalyst of the future” by Morgan Stanley – is good business?
Tokens are down: Legendary investor Warren Buffett bought £3.3bn worth of TSMC shares
Or does TSMC’s position at the center of the tech cold war between China and America make the geopolitical challenges insurmountable, especially given the implications of the unrest in China?
TSMC, the ninth largest publicly traded company in the world, has a 53% market share, thanks to its know-how, skilled workforce and buying power – the kind of characteristics Buffett seeks. It requires companies to have a wide “economic moat” that can fend off competition.
A 110-mile-wide strait separates Taiwan from China. But the larger neighbor claims Taiwan as its own, prompting The Economist magazine to call the island “the most dangerous place on earth”.
Protests over Covid protocols in major Chinese cities that have rattled markets could prompt Beijing to step up its threats against Taiwan as a show of global authority.
This week, our Prime Minister Rishi Sunak declared that the golden age of UK-China relations was over. But tensions between China and Western nations have already been heightened by the policies of US President Joe Biden.
The new Chips and Science Law aims to limit the supply to China of advanced chips for AI or military purposes. The United States is also seeking to reduce its dependence on Taiwan by providing subsidies to companies manufacturing chips in the United States.
In 1990, America accounted for 37% of global chip production, but it is now 12%, despite being the world’s second largest customer for all types of chips, after China.
Recent protests in China have destabilized markets due to risks to global supply chains, though Beijing may need to change its stance.
Philip Shaw, Chief Economist at Investec, comments: “There is a clear conflict between politics and China’s need to rescue its weakening economy. The campaign to improve vaccination rates will now be crucial.
Protest damage to TSMC and others is a factor in the PHLX Semiconductor Index’s 32% plunge this year.
Other big names include ASML, Broadcom, Intel, Nvidia and Qualcomm.
TSMC shares are 21% below their January level, although Buffett’s intervention brought a rebound.
This will relieve fundholders such as Baillie Gifford Positive Change, Franklin Templeton Emerging Markets and Fidelity Asia who hold stakes in the company.
Chetan Sehgal of Templeton Trust said: “We continue to believe that TSMC is among the best stocks emerging markets has to offer.”
But anyone, like me, considering following Buffett has to wonder if the geopolitical downturn and market bear cycle caused by the global downturn is being satisfactorily reflected in the current price. TSMC, which has a market capitalization of 12.6 trillion Taiwan dollars (£330 billion), is valued at just 12.7 times expected earnings.
Andy Wong of LW Asset Management, the Hong Kong wealth manager, thinks it’s “a great long-term value play” – a view that appears based on Morgan Stanley’s forecast that the market will relaunch in the second half of 2023.
TSMC has 17 factories – 15 in Taiwan, two in China – and is building a £10 billion factory in Phoenix, Arizona, which it is rumored could supply Apple by 2024.
Apple accounted for a quarter of sales in 2021. Customers could also count Tesla, and a second factory in the state is a possibility.
Phoenix is about 1,300 miles from Berkshire Hathaway’s headquarters in Nebraska. Buffett would concede that he is far from understanding the technologies behind chip manufacturing.
But he seems convinced of the need for these components and the benefits offered: TSMC’s operating margin is around 50%.
Investing in this company based in a dangerous location is dangerous, but sometimes that’s part of the fun, which is why I’ll be looking to add other chip stocks like Nvidia – down 48% this year.
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