First to understand the reasons behind Warren Buffet latest move to exit most of his stake in TSMC, having only started a position in Q3 of 2022, we probably have to approach TSMC accordance to Warren Buffet's investment style.
His decision to invest in a company can be broadly based on the few points below
-Company is undervalued based on it's intrinsic value
-Durable moat
-Not swayed by short-term market, willing to invest long term
- Focus on management
- Margin of safety
Company is undervalued based on it's intrinsic value
The go to calculation of intrinsic value is using discounted cash flow model which at present values TSMC around $100-$120 range. Clearly, the company is undervalued based on it's current share price of $90 and even more so when it was estimated that Warren Buffet paid a significantly lower price of $68.52 last year.
We could see that TSMC met the condition of an undervalued stock
Durable moat
TSMC's moat is its technology leadership in the semiconductor industry. The company invests heavily in research and development to develop and improve its manufacturing processes and to create new technologies that give it a competitive edge.
Their manufacturing processes are among the most advanced in the industry especially with the usage of Extreme Ultraviolet (EUV) lithography. EUV allows TSMC to produce chips as small as 5 nanometers, which is currently one of the smallest feature sizes in the industry.
This also allows TSMC to manufacture chips with higher performance and lower power consumption than its competitors.
It is shown that TSMC met the condition of having a durable moat as well.
Not swayed by short-term market fluctuations, willing to invest long term
Warren Buffet has emphasized before the importance of patience and discipline in holding onto quality investments for the long haul rather than trying to time the market or make quick trades. Therefore TSMC unlikely is a position he is in for quick profit despite the recent big price run to the upside.
Focus on management
An outstanding management team is in every investors checklist including Warren Buffet's . TSMC has a strong reputation for being well managed and having a stable leadership team.
The company has consistently received high scores in environmental, social, and governance (ESG) ratings
Management issues in this case is unlikely the reason for the exit as well
Margin of safety
Margin of safety approach is a key part of Warren Buffett's investment philosophy that is based on a careful analysis of the company's financial statements and other relevant information. He then sets a "margin of safety" by buying the stock at a price well below its estimated intrinsic value, in order to reduce the risk of losses in case his analysis turns out to be incorrect.
Here it is likely the margin of safety for TSMC had been breached and my reasons are as follows
It is well noted that for companies to remain relevant in the semiconductors industry, they have to constantly invest high capital into research and development. This is also highlighted by Charlie Munger, Warren Buffet's right hand man in his recent interview.
He explained that he had never have a liking for the Semiconductor Industry as companies in it have to bet their profit each time they produce a new generation of chips where you throw in all the money you previously made for a chance to succeed. However, he did said in the case of TSMC, equipped with their technology and high margin, the chances of them succeeding greatly increases.
Thoughts
I believe it is likely the margin of safety for TSMC has been breached that might have caused Warren Buffet to exit his position.
Semiconductor is never an industry that is popular with Warren Buffet due to the points highlighted earlier
The ever ongoing likelihood of conflict between USA and China might have lowered this margin even further as TSMC will be a the centerpiece of action in the conflict between the two superpower.
I feel that the recent large rally of TSMC price might have cause the margin to shrink small enough that ultimately led to Warren Buffet's decision to liquidate TSMC
$Taiwan Semiconductor Manufacturing(TSM)$
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