3 Things About Taiwan Semiconductor That Smart Investors Know – The Motley Fool

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Taiwan Semiconductor Manufacturing (TSM -1.20%), popularly known as TSMC, made news in November when the 13F filing from Warren Buffett’s Berkshire Hathaway revealed that the holding company had taken a $4 billion stake in the semiconductor manufacturer. Although it’s unknown whether Buffett or one of his lieutenants made the purchase, Berkshire’s interest in making a stock buy seemingly validates the investment thesis for TSMC.
For new investors, it’s not too late to follow Buffett’s team into this stock. In the end, TSMC should continue to prosper because of three key attributes that the smartest investors know about this company.
Buffett has made it known that he likes companies making products that are continuously in demand. That’s part of why Berkshire bought companies like See’s Candies and Justin Boots in the past. This attribute pertains to semiconductors as well, since chips go into seemingly every electronics-related product built today. So it shouldn’t come as a big surprise that TSMC would attract the attention of Berkshire.
TSMC dominates today’s semiconductor manufacturing industry, claiming 56% of the total market, according to TrendForce. Moreover, most of the top chip design companies in the world turn to TSMC’s fabrication plants (called fabs) to make their chips. Clients such as Apple, Nvidia, Advanced Micro Devices, and one-time industry leader Intel are among its customers.
That varied customer base helped TSMC generate $76 billion in revenue in 2022. And despite a slowdown in the chip industry, it still grew 43% from 2021 levels. That enabled TSMC to earn $34 billion in net income, which increased 70% year over year as the company kept cost and expense growth in check.
Furthermore, amid massive spending on property and equipment to maintain its technical lead, it generated nearly $18 billion in free cash flow. That allowed TSMC to pay shareholders more than $9.5 billion in dividends, or about $1.77 per share annually. That measure of stability may draw value as well as growth investors.
Also, the stock itself appears more attractive. Despite a significant decline over the last year, TSMC has risen by more than 45% from its November low. And even with that recovery, it currently sells at a P/E ratio of just 15, making it cheaper than it has been in years.
Still, its financial advantages have not placated TSMC critics who believe this business, which operates mainly in Taiwan, is vulnerable if China invades Taiwan. That belief holds some validity since China has threatened to invade Taiwan at various times since before the semiconductor industry existed.
Additionally, Western governments have echoed concerns about this geopolitical threat and offered subsidies to companies to build more fabs. That fear may have played a part in TSMC announcing plans to have a $40 billion fab in Arizona up and running by 2024.
Nonetheless, Buffett and other TSMC investors are likely betting that Taiwan’s role in the chip industry protects the island from an invasion. Since TSMC is the industry leader, China’s tech industry depends partially on chips from Taiwan. TSMC’s fabs would likely not survive such an attack, so it reduces the likelihood that China would take such an action. 
Considering TSMC’s industry dominance and strong financials, it is little wonder that investors gravitated toward the stock. While the Berkshire investment certainly brought the company positive attention, its underlying business and financial fundamentals will probably drive this semiconductor stock longer term.
Admittedly, the company operating in a geopolitical hotbed can create some concerns. However, its importance to top chip companies and its low valuation make it a no-brainer for value and growth investors alike.
Will Healy has positions in Advanced Micro Devices, Berkshire Hathaway, and Intel. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Berkshire Hathaway, Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway, short January 2023 $265 calls on Berkshire Hathaway, short January 2025 $45 puts on Intel, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
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