Summary
TSMC has traded weak over the last several months on news that Warren Buffett unloaded shares after making an initial investment last year.
The chip manufacturing giant is set to ride the AI chip boom, with the TAM set to surge in the years ahead.
The stock remains incredibly cheap at 13.5x forward EPS targets, a 50% discount to Apple with similar geopolitical risks from China.
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In no huge surprise, Warren Buffett and Berkshire Hathaway $Berkshire Hathaway(BRK.A)$ $Berkshire Hathaway(BRK.B)$ sold out of a remaining small position in Taiwan Semiconductor Manufacturing Company Limited $Taiwan Semiconductor Manufacturing(TSM)$. Buffett had second thoughts on investing in a company like that, but most technology companies face similar risks. My investment thesis remains ultra-bullish on the chip manufacturing stock, as the investment firm selling out has pressured the shares.
Source: Finviz
Buffett Unloads All Shares
Back in February, Berkshire Hathaway had mostly unloaded a $4.1 billion position in TSMC shares. In several interviews since, Buffett was clear the investment firm had second thoughts on the new investment.
Berkshire has a cash balance of $130 billion, so the company has limited opportunities to invest in firms where a $10+ billion position doesn't move the needle of the stock. As an example, Buffett has been aggressively purchasing shares in Occidental Petroleum $Occidental(OXY)$, but Berkshire already owns nearly 25% of the firm and has only $12 billion more to invest to reach a 50% threshold.
TSMC is worth more than $415 billion now, and Buffett could've invested over $40 billion before causing any ripple in the stock by reaching 10% ownership. Such an investment would already make the stock the second largest behind Apple $Apple(AAPL)$.
Source: CNBC
The ironic part is that Apple already is established as being dependent on China. The tech giant has up to 95% of production in China and is spending aggressively to move to India, with Hon Hai Precision $Hon Hai Precision Industry Co. Ltd.(HNHPF)$ investing $500 million now to boost production in that country.
TSMC is making similar moves with a massive fab being built in Arizona along with another fab being built in Japan. Ultimately, though, both TSMC and Apple will rely heavily on Taiwan and mainland China for both production and sales for the decade ahead.
In general, an investor probably doesn't want multiple top investments focused on the tech sector reliant on chips and products produced in the this region, but the argument here is that TSMC is the better investment. The stock now trades at about half the forward P/E multiple of Apple and is very cheap at only 13.5x forward earnings.
Data by YCharts
After a weak year in 2023, analysts forecast TSMC returning to growing EPS at a clip-topping 20%. On the other hand, Apple is forecast to struggle to reach 10% growth in the years ahead.
AI Boom
The booming demand for AI chips should only ramp up the demand for TSMC in the years ahead. The company has the leading-edge chip manufacturing technology and AI chip demand for data centers will far outgrow the demand for new devices like PCs and smartphones. Analysts are starting to ramp up chip sales for prime customers Nvidia $NVIDIA Corp(NVDA)$ in a sign of how AI demand will start flowing to TSMC.
Chip companies from AMD $Advanced Micro Devices(AMD)$ to Intel $Intel(INTC)$ have promoted massive market growth opportunities in the years ahead. Some of these forecasts even came out before the big AI boom in the last six months from the generative AI chat revolution going on with the release of ChatGPT by Open AI.
In the case of a primary customer, AMD promotes an enormous $300 billion chip TAM in the next five years. The TAM is forecast to grow from $125 billion at the time of the Xilinx merger, with areas such as data center surging from $50 billion to $125 billion in the five-year period.
Source: AMD '23 Analyst Day presentation
Again, this financial analysis took place back last June and the AI boom only took off at the end of 2022. The enormous TAM has probably grown with data center and possibly embedded demand set to soar along with the growing opportunity in automotive.
TSMC is set to remain the leader in leading-edge chip manufacturing, making the stock a prime buy on the current weakness. Nvidia already is trading toward all-time highs and AMD is hitting yearly highs, while TSMC is trading near the recent 2023 lows due to the weakness caused by Buffett suddenly turning negative on the chip stock.
Data by YCharts
Takeaway
The key investor takeaway is that TSMC remains too cheap for the opportunity ahead. The AI boom should only boost the demand for leading-edge chip manufacturing, while Warren Buffett dumping the stock has capped the shares, providing the opportunity to own TSMC on weakness while the sector is already racing ahead.
Source: Seeking Alpha
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