President Biden recently attended a move-in event in Arizona for Taiwan Semiconductor (TSM) — signaling the installation of essential equipment has begun at the company's new plant, explains Tony Daltorio, contributing editor at Investors Alley.
With a $40 billion total investment, the plant is slated to begin making advanced chips as early as the end of 2023. Apple (AAPL) will be the most important first customer when it begins production, with Nvidia (NVDA) likely to follow suit.
Also very interested in this development was Warren Buffett, who recently bought $4.1 billion of TSM ADRs through Berkshire Hathaway (BRK.A), according to a November 14 filing. The purchase made it the tenth-biggest position in the Berkshire portfolio.
There is a certain logic to Buffett’s TSM purchase and to his earlier $130 billion investment in Apple stock. After all, it is Taiwan Semiconductor that makes most of the advanced chips that go into Apple’s products like the iPhone.
As with Buffett’s investment in Apple, TSM looked cheap on a price/earnings ratio. In TSM’s case, the P/E is 12, thanks to the more than 40% drop in the stock year-to-date before the news broke of the purchase by Berkshire. And like Apple, Taiwan Semi has been growing fast and is highly profitable, despite being in a capital-intensive industry.
Taiwan Semiconductor has a trait that Buffett always looks for in companies he buys — a wide economic “moat.” The company has a virtual monopoly on manufacturing the fastest computer chips, being the world’s largest contract manufacturer of advanced processor chips.
There are long-term economic tailwinds — the growth of AI, the Internet of Things, and high-performance computing applications — blowing in Taiwan Semiconductor’s favor that will likely last for decades. There is also the company’s strong relationships with leaders in multiple subsectors: Apple in mobile chips, Nvidia in graphic processors, and Xilinx (XLNX) in reprogrammable chips.
TSM has increased its revenue at a five-year compound annual rate of 17%, has a five-year average return on capital of 16%, and has operating margins of more than 50%.
It has had consistent excess return on invested capital and return on equity figures, both averaging more than 20% for the past decade. As of January 2022, the company hiked its return on equity target to 25% from 20%, in view of the aforementioned long-term drivers.
In the past, Buffett has said his favorite holding period is “forever.” This will apply to his purchase of TSM stock; he will likely regard near-term profit weakness as a blip that can be ridden out because of the company’s large cash buffer. Indeed, at the end of the third quarter, TSM had a cash pile of $50.13 billion, an increase of 41% year-over-year. TSM is a buy anywhere around $80.