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

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

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Warren Buffett’s group bought a $5 billion stake in the company last quarter amid a rout that wiped out more than $250 billion from the stock. It has not publicly commented on the deal, but market watchers attribute the purchase to TSMC’s cheap valuations, technology leadership and strong fundamentals.

The Berkshire purchase, along with a similar move by Tiger Global Management LLC, may signal that value is emerging in the chip industry after a turbulent period marked by slowing demand and tensions between the United States and China. A growing number of Wall Street banks have reiterated bullish calls on TSMC, with analysts at Morgan Stanley saying the stock has reached a “good entry point.”

“With its superior technology leadership, TSMC is a very long-term value play if you look beyond the current semiconductor shorting cycle,” said Andy Wong, fund manager at LW Asset Management. “Buffett can invest in growth in the next decade as demand from the Internet of Things, renewable energy and automobiles increases.”

TSMC shares have jumped about 10% in Taiwan since the Berkshire acquisition was revealed last week. Morgan Stanley said it is trading below its progressive valuation with a discount of 30% to 40% due to geopolitical risks, according to a note on Nov. 8.

The stock has a multiple valuation of about 12.6 times based on its estimated earnings for next year, according to data compiled by Bloomberg. Goldman Sachs Group Inc. That this is the minimum average of 10 years. The company is cheaper than most members of the Philadelphia Stock Exchange’s semiconductor index, which tracks the largest listed chip companies in the United States.

“We expect TSMC to continue to demonstrate resilience against other peers during the industry downsizing cycle due to its superior execution,” Goldman analysts wrote in a November 16 note. They added that the valuations are attractive and that the company is better positioned for long-term structural growth of the industry in 5G, artificial intelligence, high-performance computing and electric vehicles.

Flowing cash

TSMC also has another advantage: It managed double-digit sales growth and gross margin well above 50% this year despite a slowdown in the sector. This capped the stock’s year-to-date loss to 21%, helping it outperform peers like Micron Technology Inc. and SK Hynix Inc.

According to analysts, the Taiwanese company’s history of healthy cash flow and stable earnings may have helped attract Buffett.

Felix Lee, equity analyst at Morningstar Asia Ltd. He added that the company has a proven track record of paying dividends since the 2000s.

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

However, while Buffett’s bet has boosted retail sentiment towards stocks, stocks may continue to experience volatility in the short term due to geopolitical risks and stock adjustments in the chip industry.

The semiconductor sector is at the center of a growing rift between the United States and China as the two countries vie for leadership in the global technology industry. Washington has severely sanctioned high-quality chips being produced for Chinese customers specifically to prevent them from getting into the hands of the Chinese military.

To reflect the risks, analysts have cut the average price target for TSMC stock by about 30% since February. Its US-listed shares are down more than 30% this year, in line with the drop in the global semiconductor index.

“Investors are concerned about the higher-than-usual stock, which shows no signs of abating yet,” said Jason Su, fund manager at Cathay Taiwan 5G Plus Communications ETF. “Companies including TSMC said earlier that they expect the inventory correction to continue through the first half of next year,” he said, adding that chip inventories are likely to rebound after the completion of inventory adjustments.

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