With little knowledge about tech, Buffet dives into semiconductors market
Put an underevaluated stock that’s at the ground and the prospects of semiconductors market together, and you can easily understand one of the most recent business decisions of Warren Buffett.
During Q3, the Oracle of Omaha bought 60.1 million American depositary shares of Taiwan Semiconductor Manufacturing, or TSMC, worth over $4 billion.
So as of the end of September, Berkshire Hathaway, Buffet’s multinational conglomerate, owns 1.2% of a near-monopoly in cutting-edge tech.
It is an investment almost as exotic as his $11 billion bet on IBM, that can be evaluated as a fail. Except that with TSMC things look way too appealing to be ignored.
Firstly, TSMC’s stock has taken a beating this year, in part on fear China might invade Taiwan, its headquarters. Another reason for devaluation is a chip supply glut amid slowing demand.
All this have dragged down the company’s shares by more than a fifth since the start of 2022.
They currently trade at less than 12 times the next 12 months’ forecast earnings, according to Refinitiv cited by Reuters.
That’s well below their five-year average of 19 times. But that’s OK, since Buffet likes to buy blue chips at the dip.
And there are strong indicators that the semiconductor market will recover by 2024. Analysts reckon TSMC’s earnings growth will rebound to 23% that year, from 4% in 2023.
Buffet is surely eyeing one of the highest profit margins in the tech industry with TMSC. Now the indicator is at nearly 60%, the very top in tech business.
Also, the chipmaker’s dominance, including an estimated 90% share in making the most advanced semiconductors, gives the remaining reasons for Buffet to put his money on TSMC.
With this latest investment, Berkshire Hathaway upped the level of business sophistication.
Its portfolio now spans stakes in TSMC customer Apple to oil-and-gas giants Chevron and Occidental Petroleum to Jefferies Financial Group.
Getting into the business of semiconductors could prove very lucrative for Buffett, who once admitted he didn’t understand technology companies sufficiently.