To The Moon

Yesterday, Buffett's $Berkshire Hathaway(BRK.B)$ released the 13F document.

According to the data, Berkshire bought 60.06 million shares of $Taiwan Semiconductor Manufacturing(TSM)$ in the Q3, with a market value of US$ 4.1 billion. $Taiwan Semiconductor Manufacturing(TSM)$ becomes its 10th largest holding shares:

This news is intriguing because of the following reasons:

1. TSMC is the world's top chip manufacturing giant, a typical semiconductor technology stock. But as we all know, Buffett has always been cautious about technology stocks;

2. Buffett bought 60 million shares of TSMC for the first time, becoming its 10th largest heavy-duty stock. This shows that Buffett is very bullish on TSMC;

3. TSMC is headquartered in Taiwan. Geopolitical risks have been haunting its share prices. However, Buffett, the most "conservative" investor, bought a lot of shares. Is he not afraid of risks or he knew some news that the geopolitical risks have been cleared?

1. Why did Buffett choose TSMC?

1) Semiconductor is the Future

Semiconductors are the cornerstone of economy. They are needed for cell phones, cars and IoT. With the improvement of intelligence, the demand for semiconductors will double.

According to the data from Infineon and Strategy Analytics,

the value of Power Electronic Devices for traditional vehicles is $88 per vehicle, while that for pure electric vehicles was $459 per vehicle, representing an increase of 421.6%.

2) The moat of TSMC - no competitors

In the semiconductor industry chain, manufacturing is the most difficult part.

At present, only TSMC and Samsung can mass-produce the advanced 5nm process. Samsung has been losing out to TSMC in yield. By the end of 2022, TSMC will mass-produce 3 nm process. Globally, TSMC has no real competitors.

The moat of the TSMC mainly consists of 2 parts:

• Technological level

The company continuously invested in R&D. TSMC spent as much as US$ 4.05 billion on research and development in the first three quarters of 2022. If others want to catch up, the annual investment in research and development alone is scary.

• Semiconductor manufacturing is a heavy asset.

The investment in building a 5-nanometer fab is as high as US$ 10 billion. With the advent of the 3 nm era, the cost of building the plant will be higher.

3) Industry leader

TSMC is not inherently the leader in the industry. At the end of last century, the world's leading fabs were Samsung and $Intel(INTC)$ , and TSMC was unknown. 

In 2018, TSMC began mass production of 7 nm process. It has defeated other giants and became the industry leader up to now.

The monopoly and moat are what Buffett favors in investing.

2. Why did Buffett choose to bottom TSM in the Q3?

After the pandemic, home office has increased demand for semiconductors. TSMC's share price soared and its valuation reached an all-time high. As a cyclical industry, Buffett obviously won't buy it at industry highs.

This year, the pandemic dividend subsided, and global inflation suppressed consumer demand, the semiconductor industry entered a downturn. Shares of semiconductor companies plunged, shares of TSMC halved from an all-time high.

From the valuation, TSMC's P/B ratio and P/E ratio are close to the lowest point in recent 10 years. Given that TSMC has achieved an ultra-high level of advanced manufacturing after 2018, the current valuation is extremely attractive:

data from bloomberg

3. The semiconductor industry hit the bottom in Q3

The semiconductor industry completes cycles every 3-4 years.

History shows that when inventories peaked, semiconductor stock prices bottomed out.

In terms of $NVIDIA Corp(NVDA)$ inventory and share price trend, in the first quarter of fiscal 2020 (corresponding to the natural year for the quarterly report on April 28, 2019), Nvidia inventory began to reduce, and then the share price started to rally:

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data from company earnings

At present, the Q3 reports of major semiconductor companies have been released. According to statistics, there is a high probability that inventories in the semiconductor industry peaked in the third quarter of this year:

​$Qualcomm(QCOM)$ : Q4 revenue is expected to decline by double-digits, mainly in response to the impact of terminal inventory de-stocking

​$Media Tek Inc.(MDTKF)$ : expects chip business revenue to return to YoY growth starting in 2023Q1

​$Taiwan Semiconductor Manufacturing(TSM)$ : Expect Q3 to be inventory high point, expected to return to normal after 2023Q2

Apart from the historical low TSMC valuation, $Philadelphia Semiconductor Index(SOX)$ is also close to the historical low:

As a representative of growth stocks, Semiconductor is greatly affected by the Fed's interest rate hike. However, the US CPI data in October indicated that inflation may peak, and the market expects the pace of subsequent interest rate increases by the Federal Reserve to slow down significantly.

Bottom Line

Semiconductors hit a rare low in the third quarter.

Looking into the future, the industry will soon see a reversal and the macro environment will also become favorable.

Coupled with Buffett's support, TSMC and the entire semiconductor industry will soon usher in a new cycle of growth.