Warren Buffett is one of the most prolific investors in modern history. For six decades, he helped build Berkshire Hathaway into an investment powerhouse -- generating 19.9% compound annual gains over this period. For reference, these returns are nearly double the total return of the S&P 500.
One aspect of Buffett's investment philosophy that is rather unique, however, is that he did not pack Berkshire's portfolio with growth stocks or seek opportunities in emerging technologies. For these reasons, you won't find much in the way of software, artificial intelligence (AI), or semiconductors among Buffett's top stocks.
Let's explore some of the pillars supporting Buffett's investment criteria. From there, I'll make the case for which AI chip stock I think fits many of Buffett's requirements -- making it a unique value opportunity in an otherwise high-growth industry at the moment.
How to invest like Warren Buffett
Some of the largest positions in Berkshire's portfolio include Apple, American Express, Coca-Cola, Bank of America, Chevron, and Occidental Petroleum.
There are a number of threads that stitch these companies together. First, each has achieved a high level of brand equity. This keeps consumers loyal over time, thereby insulating the overall business from competitive forces.
In addition, each of these companies generates heaps of cash. Cash flow is important, as it provides the business with the financial flexibility to reinvest into new products or reward investors in the form of share buybacks or dividends.
Finally, Buffett is a contrarian. While some of the companies above may face cyclical risks, Buffett has remained steadfast in his ability to look past short-term headwinds and keep the long-term growth narrative in focus. As a value investor, he often pounces on opportunities that others have discounted.
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This AI chip stock has some Buffett stock characteristics
One AI stock that I think checks off many of Buffett's boxes is Taiwan Semiconductor Manufacturing (TSM 0.57%). But don't take my word for it, Berkshire did briefly own Taiwan Semi stock a couple of years ago.
On the surface, this pick may come across as unusual. After all, Taiwan Semi faces some geopolitical risk given uncertainties surrounding its relationship with China. In fact, these risk factors played a role in Berkshire eventually exiting its TSMC position back in 2023. Moreover, the chip industry is highly cyclical, adding yet another layer of uncertainty surrounding the company's growth.
Like Buffett, however, I'm going to act as a contrarian to support my personal long-term bull thesis surrounding TSMC.
Similar to many stocks in Berkshire's portfolio, Taiwan Semi has built a robust brand moat. While the company faces some competition from Samsung Electronics and Intel, industry research suggests that Taiwan Semi owns more than 60% of the foundry market. Not only does this provide TSMC with a healthy lead over the competition, but secular tailwinds could actually help the company separate from the pack even more.
Global management consulting firm McKinsey & Company is forecasting AI infrastructure spend to reach nearly $7 trillion by next decade. Furthermore, McKinsey is forecasting that almost half of this spending will be allocated toward hardware for data centers.
With new chipsets expected to be released by Nvidia and Advanced Micro Devices, in combination with custom silicon solutions from cloud hyperscalers Amazon, Alphabet, and Microsoft, I am optimistic that Taiwan Semi's fabrication services will continue to see robust demand over the coming years.
Is Taiwan Semiconductor stock a buy right now?
The chart below illustrates the forward price-to-earnings (P/E) multiple trend for TSMC and other leading chip stocks over the past year.
TSM PE Ratio (Forward) data by YCharts
The obvious takeaway from the chart is that Taiwan Semi trades for a steep discount relative to Nvidia and Broadcom, based on forward earnings ratios. This could suggest that Taiwan Semi is an undervalued opportunity within the chip space right now. With that said, a forward P/E of 22.2 is above the historical average for the S&P 500 -- which is around 17.
While Buffett likely wouldn't see Taiwan Semi as a value stock, I would counter this due to the fact that the broader market is trading at lofty valuations in general, and TSMC is still much more reasonably priced compared to its chip peers.
TSM EPS Diluted (TTM) data by YCharts
In addition, Wall Street's consensus forecasts suggest Taiwan Semi has significant growth in store over the next few years. Thanks to ongoing infrastructure spending and robust demand for chips, TSMC could nearly double its profitability over just the next two years.
Given the company's long-run growth prospects and rising profitability profile, I think Taiwan Semi is a bargain and investors should consider this monster opportunity for the long haul.
