What happened
Shares of Taiwan Semiconductor Manufacturing (TSM +1.40%) were up 12.4% as of 10:19 a.m. ET on Tuesday after Warren Buffett's Berkshire Hathaway (BRK.A 1.08%) (BRK.B 1.09%) disclosed a large stake in the chipmaker.
TSM shares have fallen sharply this year over slowing demand in the semiconductor industry, but the investment by Berkshire is a signal that the stock has reached value territory.
NYSE: TSM
Key Data Points
So what
TSM is the leading chip manufacturer in the world. It makes chips for Nvidia, Advanced Micro Devices, Intel, among others. Its expertise in cutting-edge chip technology allows the business to generate a high operating margin close to 50%, which is rare.
It certainly fits the type of industry-leading, profitable company with a long history of operating excellence that would draw the interest of Buffett or one of his investing lieutenants, Todd Combs or Ted Weschler.
However, Berkshire is clearly willing to be patient with this investment, as TSM faces a number of headwinds in the near term, including rising inflationary costs and slowing chip demand. Moreover, Intel is expanding its U.S. chip manufacturing capacity, which some investors view as a major threat to TSM's foundry business.
Now what
TSM reported strong revenue growth of 48% year over year in the third quarter, led by growing demand for chips used in smartphones, Internet of Things, and automotive applications. The stock has fallen over management's warning of slowing growth in the fourth quarter, where revenue is expected to increase by less than 1% over the third quarter.
Berkshire's $4.1 billion stake in the company is a good sign for long-term investors, but in the near term, the market may revert its attention back to TSM's lower guidance and headwinds in 2023, which could keep the stock down for a while.
The investment in TSM is clearly a bet on the long-term adoption curve of high-performance computing applications, which are playing an increasingly important role in the global economy. TSM is still well positioned to ride that growth.
