In Berkshire Hathaway‘s (NYSE: BRK.A) (NYSE: BRK.B) latest 13F filing (a disclosure all firms must file if their holdings total more than $100 million), a new position in Taiwan Semiconductor (NYSE: TSM) was revealed. With a total investment worth over $4 billion, it’s the 10th largest Berkshire position and makes up about 1.4% of its total portfolio.
That’s a significant investment for Warren Buffett and the company, so they are clearly excited about something. Additionally, the stock is currently trading around the lowest price it experienced in Q3, so investors can get in at the same or even lower price than Buffett did.
So should investors follow Buffett’s lead? Or are there better stocks out there?
Taiwan Semiconductor presents a significant risk investors must understand
By revenue, Taiwan Semiconductor is the largest semiconductor company worldwide. However, it’s not a company you or I can purchase directly from — it supplies chips to large customers.
Apple, Nvidia, and AMD are all clients of Taiwan Semiconductor, which spreads out the risk of one company changing suppliers or going under. However, it’s widely known that Apple is Taiwan Semiconductor’s largest customer, making up around one-quarter of revenue, while the next closest is around 5%. This might concern some investors, but it doesn’t worry Buffett because he is a significant holder of both Apple (his largest holding) and Taiwan Semiconductor (Berkshire owns 1.2% of the company).
As Apple attempts to source more products domestically, Taiwan Semiconductor is answering the call. By investing $40 billion to build two new chip manufacturing plants in Arizona, Taiwan Semiconductor is making one of the largest foreign investments in U.S. history. Apple CEO Tim Cook confirmed Apple would source the chips from these plants, so investors shouldn’t be worried about losing Apple’s business.
However, one thing investors are worried about (and will likely never be resolved) is its location. China-Taiwan relations are incredibly complex, and many worry about a complete Chinese takeover someday. This would be a massive problem for the company, and the stock would negatively react if an invasion occurred. Again, I don’t know if this will ever happen, but it is an investment risk you must understand before taking a position.
That’s a major red flag for many investors, but its finances may warrant taking a position regardless.
Revenue growth won’t be as good as it has been
In Q3, revenue rose 48% year over year, while net income was up 80%. Furthermore, its profit margin came in at 46%, making it among the world’s most profitable companies.
However, the good times aren’t projected to last, with the semiconductor shortage easing and spending by the U.S. consumer potentially weakening. The average analyst projects just 2.8% revenue growth in 2023, with earnings per share (EPS) decreasing from $6.45 to $5.96.
Still, the stock trades at an attractive 12.3 times forward earnings when this slowdown is factored in. Compared to its historical trailing price-to-earnings ratio, that’s a good price to pay for the stock.
Once the U.S. economy regains its strength, Taiwan Semiconductor will likely see a surge of demand from Apple and its other clients, which is reflected in analysts’ $6.45 EPS 2024 projection.
So should you follow Buffett and buy this stock? I’d say it depends on your risk tolerance. If you’re worried about Chinese aggression or a key customer like Apple leaving, you’ll want to steer far away from the stock. However, if you’re not as worried about either of those actions happening, now seems like a great time to establish a position with its relatively low valuation.
As a side benefit, Taiwan Semiconductor pays a generous 2.5% dividend yield, although the yield will fluctuate due to currency exchange issues. (Taiwan Semiconductor pays its dividend in New Taiwan dollars.)
As with any investment, keeping your exposure to the stock relevant to its risks is essential. I think a smaller position size is warranted, with Taiwan Semiconductor having one major risk that could wreck the company. Nevertheless, I think Buffett and Berkshire likely found a winner in Taiwan Semiconductor, and investors shouldn’t be afraid to follow them.
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Keithen Drury has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Berkshire Hathaway, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway, short January 2023 $265 calls on Berkshire Hathaway, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.