Apple (AAPL 0.96%) is by far the largest investment in Warren Buffett's Berkshire Hathaway portfolio. His 895 million shares mean that 39% of the portfolio's value is in Apple stock.
Although Apple is one of Buffett's biggest winners, such a significant position may appear to counter the investment strategy of Buffett and his team, which leaned toward more diversification. So, it's ironic that this investment has further increased. The question for investors is whether the strategy will work for Buffett and for Apple shareholders looking to follow his lead.
NASDAQ: AAPL
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How Berkshire's Apple investment increased
Berkshire's 13F filing following third-quarter 2022 earnings revealed a surprising purchase -- 60 million shares of Taiwan Semiconductor (TSM 4.23%). TSMC manufactures chips for the most prominent semiconductor companies, including Apple.
According to estimates from Bloomberg and DigiTimes, TSMC relied on Apple for more than 25% of its revenue in 2021. This makes Apple TSMC's largest client. That is also a large enough share that TSMC stock could easily rise and fall with the fortunes of Apple.
It also shows how critical TSMC is to Apple. The chips it makes go into critical Apple products such as the iPhone, iPad, and Mac computers, making the chipmaker an indispensable part of Apple's business.
Why this is a wise strategy
The TSMC purchase amounts to "concentrated diversification." It benefits Berkshire because it diversifies Buffett's portfolio while exposing itself more deeply to Apple. Since over 25% of TSMC's business involves Apple, that means just under 75% does not. Many of TSMC's other clients -- which include Advanced Micro Devices, Broadcom, Nvidia, and Qualcomm -- lead niches within the semiconductor industry.
Moreover, Buffett likes market leaders, and TSMC fits that description. According to TrendForce, TSMC produces slightly more than half of the world's semiconductors. That dominance comes largely from maintaining technical leads over companies like Intel and Samsung. That fact means that its segment-leading clients, including Apple, will likely continue to turn to TSMC.
Investors will also like that TSMC holds the potential as a profitable stand-alone investment. Its revenue in the first nine months of 2022 of $56 billion grew 43% compared with the same period in 2021. Also, its nearly $25 billion in net income left it plenty of cash to invest in the business and pay investors like Buffett more than $7 billion in dividends.
NYSE: TSM
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Buffett and his team also bought this stock at a lower valuation than Apple. During Q3, when Berkshire purchased five lots of shares, TSMC traded at a P/E ratio ranging from 12 to 18. In comparison, Apple sold for between 22 times and 28 times earnings, an added factor that may have led to the purchase of TSMC shares.
Should Apple investors follow such a lead?
Investors with significant Apple holdings could further concentrate by adding TSMC shares. At a 14 P/E ratio, it remains a cheaper chip stock than Apple and trades near levels where Buffett's company bought TSMC shares.
However, investors should not expect this strategy to work most of the time. Even if one can understand a company's suppliers well, it is not typical for a related company to offer a low valuation and considerable growth potential.
Nonetheless, the TSMC purchase looks like a wise strategy in Buffett's case, and shareholders in Apple, TSMC, and Berkshire Hathaway should profit as a result.
