In the most recent quarter, the company saw a $5 billion investment from Warren Buffett’s conglomerate, at which time the stock had lost over $250 billion. Market analysts credit the purchase to TSMC’s low valuations, technological leadership, and strong fundamentals even though the company hasn’t officially commented on the sale.
After a turbulent period marked by slowing demand and US-China tensions, Berkshire’s purchase, along with a similar action by Tiger Global Management LLC, may indicate that value is beginning to emerge in the chip industry. Wall Street banks have increased their bullish predictions for TSMC, with Morgan Stanley analysts stating that the stock has reached “a good entry point.”
“With its superior technology leadership, TSMC is a great value play in the long-term if you look past the current semiconductor downcycle,” said Andy Wong, fund manager at LW Asset Management. “Buffett could be investing in the next-decade growth with burgeoning demand from IoT, renewable and automobiles.”
Since Berkshire’s acquisition was made public last week, TSMC’s shares in Taiwan have increased by about 10%. According to a Nov. 8 note from Morgan Stanley, they are currently trading at a 30% to 40% discount to their downcycle valuation because of geopolitical risks.
According to data gathered by Bloomberg, the stock has a valuation multiple of roughly 12.6 times based on its anticipated earnings for the upcoming year. That is thought to be the lower end of the 10-year average by Goldman Sachs Group Inc. The company is more affordable than the majority of the companies in the largest US-listed semiconductor index, the Philadelphia Stock Exchange Semiconductor Index.
“We expect TSMC to continue to show its resilience versus other peers during the industry downcycle given its superior execution,” Goldman analysts wrote in a Nov. 16 note. Valuations are attractive and the firm is best placed to capture the industry’s long-term structural growth in 5G, artificial intelligence, high-performance computing and electric vehicles, they added.
In spite of the industry slump, TSMC was nevertheless able to produce double-digit sales growth and a gross margin well above 50% this year. It has helped the company beat peers like Micron Technology Inc. and SK Hynix Inc. by capping its year-to-date loss at 21%.
According to analysts, the Taiwanese company’s track record of strong cash flow and consistent dividends may have also contributed to Buffett’s interest.
