Buffett’s $5 billion TSMC purchase adds to the wave of bullish calls

(Bloomberg) — For investors looking for a dip buying opportunity in the global chip industry, Berkshire Hathaway Inc. can recommend: Taiwan Semiconductor Manufacturing Co.

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Warren Buffett’s conglomerate bought a $5 billion stake in the firm last quarter amid a setback that wiped $250 billion off the stock. It did not comment publicly on the deal, but market watchers attribute the purchase to TSMC’s cheap valuations, technology leadership and solid fundamentals.

Berkshire’s purchase, along with a similar move by Tiger Global Management LLC, could signal value is emerging in the chip industry after a turbulent period marked by slowing demand and U.S.-China tensions. A growing number of Wall Street banks have confirmed bullish calls on TSMC, with Morgan Stanley analysts saying the stock has reached a “good entry point.”

“With its added technology leadership, TSMC is a great value play over the long term if you look past the current semiconductor low cycle,” said Andy Wong, fund manager at LW Asset Management. “Buffett can invest in growth over the next decade with growing demand from IoT, renewable energy and cars.”

Shares of TSMC have risen nearly 10% in Taiwan since the Berkshire acquisition was announced last week. Morgan Stanley said in a Nov. 8 note that they were trading below their low-period estimate at a 30% to 40% discount due to geopolitical risks.

The stock is worth about 12.6 times its estimated earnings for the next year, according to data compiled by Bloomberg. Goldman Sachs Group Inc. estimates it will be at the low end of the 10-year average. The company is cheaper than most members of the Philadelphia Stock Exchange Semiconductor Index, which tracks the largest U.S.-listed chip companies.

“We expect TSMC to continue to demonstrate resilience against other peers during industry downturns, given its superior execution,” Goldman analysts said in a Nov. 16 note. Valuations are attractive and the company is well-positioned to capture the industry’s long-term structural growth in 5G, artificial intelligence, high-performance computing and electric vehicles.

Financial flow

TSMC also has another advantage: it has managed to deliver double-digit sales growth and gross margins well above 50% this year, despite the sector’s slowdown. That limited the stock’s year-to-date loss to 21%, its Micron Technology Inc. and helped it outperform peers such as SK Hynix Inc.

The Taiwanese company’s healthy cash flow and stable dividend history could also help attract Buffett, analysts said.

“TSMC (and other foundries) all have to incur heavy capital expenditures in the battle for technology/power leadership, but history shows that TSMC has been able to generate respectable cash flows despite the capital,” said Phelix Lee, equity analyst at Morningstar Asia Ltd. the company has a history of paying dividends since the 2000s, he said.

The stock’s trailing dividend yield is 2.6%, higher than Micron’s 0.8% and nearly on par with SK Hynix’s, according to data compiled by Bloomberg.

Still, while Buffett’s bet boosted retail sentiment against stocks, stocks could continue to fluctuate in the short term due to geopolitical risks and inventory adjustments in the chip industry.

The semiconductor sector is at the center of a growing dispute between the US and China as the two countries battle for leadership in the global technology industry. Washington has imposed heavy sanctions on high-end chips manufactured for Chinese customers to prevent them from falling into the hands of the Chinese military.

To reflect the risks, analysts have cut their average price target on TSMC’s stock by about 30% since February. Its US-listed shares have fallen more than 30% this year, in line with the decline posted by the global semiconductor benchmark.

“Investors are concerned about higher-than-usual inventory, which shows no signs of abating yet,” said Jason Su, fund manager of the Cathay Taiwan 5G Plus Communications ETF. “Companies, including TSMC, have previously said they expect the inventory correction to continue into the first half of next year,” he said, adding that chip stocks will recover once inventory corrections are completed.

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