Taiwan Semiconductor: Likely Too Risky For Warren Buffett

[Bong Hwan Ahn]

Taiwan Semiconductor: Likely Too Risky For Warren Buffett

Feb. 15, 2023 1:52 PM ETTaiwan Semiconductor Manufacturing Company Limited (TSM)BRK.A, BRK.B, INTC, SSNLF, SSNNF55 Comments16 Likes

Summary

• In a highly unusual move, Warren Buffett swiftly divested 86% of Berkshire Hathaway Inc.'s TSMC holdings after just one quarter, signaling a strategic shift in strategy on TSM.
• Was Buffett concerned with the increasingly troubling relations between the U.S. and China late last year? It has worsened since the spy balloon incident.
• Warren Buffett is highly risk-averse to losing his investors' monies. So TSMC could have proved too much of a risk to Berkshire shareholders.
• TSMC founder Morris Chang stressed that TSMC could be obliterated if a war broke out.
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Chip Somodevilla

Warren Buffett's Berkshire Hathaway Inc. (BRK.A, BRK.B) surprised Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) ("TSMC") investors, as it unloaded 86% of its holdings in Q4.

Buffett's move stunned investors, as TSM fell nearly 6% at writing, hanging in a price zone that has seen little sustained upside since the third week of January.

As such, Buffett has likely missed out on the meat of the post-FQ1 earnings upward move but still made a slight profit on his investment. According to CFRA, "Berkshire bought it for roughly $68.5 and sold for $74.5."

As such, Berkshire would have posted a price-performance return of less than 10%, a highly unusual move considering the long-term investment horizon of Warren Buffett.

Berkshire's purchase in Q3 triggered a massive upward move when it released its filings in November, which saw TSM spike toward its previous high of $83 before pulling back.

TSM price chart (weekly) (TradingView)

Hence, according to CFRA's estimates, Buffett's purchase suggests that Berkshire managed to buy in close to the lows that TSM fell to in October 2022.

As seen above, TSM formed its October lows at about the $60 level but then surged and formed its November highs at the $84 level.

As such, Buffett likely used the momentum spike to take profit on most of Berkshire's TSM exposure, despite what proved to be an excellent buy point.

Like TSM investors, we are flustered with why Berkshire would consider shedding most of its position in TSM, given the pure-play foundry's strategic role in the semiconductor space.

Perhaps, Buffett was concerned with the incremental investments TSMC would have to muster in the U.S.?

Accordingly, TSMC raised its investment in Arizona recently, with the board authorizing an additional amount of up to $3.5B. We had previously cautioned investors that TSMC's Arizona commitment could be a significant concern.

However, it likely isn't something TSMC has a choice with, given the geopolitical headwinds engulfing the US and China, necessitating technological reshoring.

Moreover, the recent spy balloon saga has likely worsened the relations between the two superpowers, suggesting that investors might need to factor in the threat of a potential conflict, adding a higher risk premium into TSM's implied fair valuation.

Notwithstanding, the founder of hedge fund Bridgewater Associates; Ray Dalio doesn't believe that China and the US.. will enter a "military conflict." However, he stressed that both countries are "still on the brink of conflict," with relations at a "new low" following the recent spy balloon incident.

Therefore, Berkshire could have anticipated late last year that taking some risk off TSM could be wise, possibly expecting U.S.-China relations to deteriorate. As such, the priority of taking necessary precautions to shield its shareholders from the risks of heightened conflict could have taken precedence over the technological superiority of TSMC over its arch-rivals Samsung (OTCPK:SSNLF) and Intel (INTC) at the moment.

But why? Investors need to understand the thinking of Warren Buffett and Charlie Munger. Keen investors should recall that Buffett highlighted at last year's Berkshire annual meeting that they have an "extreme aversion to incurring any permanent loss with [shareholders'] funds." Buffett highlighted:

And we have a — we have a — extreme aversion to incurring any permanent loss with your funds. You know, if I went broke, it wouldn’t really make any difference. It'd keep doing what I do. I'd figure out a way to read a paper and watch a little TV and think about things and talk to Charlie. But the idea of losing, permanently, other people's money — people who trust us — really, really — that's just a future I don’t want to have. And as Charlie says, "All I want to know is where I'll die so I'll never go there.” And that seems pretty sound. - Berkshire Hathaway Annual Meeting 2022 (CNBC)

As a reminder, TSMC founder Morris Chang highlighted in an interview late last year that the foundry will not be spared in the event of a military conflict. Chang accentuated: "If there's a war, I mean, [TSMC] would be destroyed. Everything will be destroyed."

And what does that mean for Berkshire Hathaway shareholders for Buffett's investment in TSMC? Catastrophic. However, with Berkshire still retaining 14% of its purchase, Buffett probably doesn't think a war would break out anytime soon. Still, Buffett's decision to dump TSM so quickly after making a monumental purchase is likely strategic rather than tactical.

With TSM hobbling around its January highs, Buffett's decision could stall further upward progress, even though we don't think it would cause a significant exodus.

Still, a pullback is looking increasingly ominous, with buyers likely needing even more momentum to march higher but could be found wanting.

Investors looking to buy the TSMC dips after Buffett's significant move can consider waiting for a more constructive consolidation first.

Rating: Hold (Reiterated).

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.