Image Source: The Motley Fool
Taiwan Semiconductor Manufacturing Company (TSMC) stock (NYSE: TSMC) is making headlines in the financial world. Yesterday the news broke that Warren Buffett Berkshire Hathaway he sold billions of dollars of his stake in the company just months after buying it. TSMC’s share price ended down 5.31% when the US market closed.
semiconductor manufacturing
TSMC is the world’s largest semiconductor foundry. Its main customer, which accounts for about a quarter of its revenue, is Apple. And it has strong relationships with Apple and other clients that make everything from smartphones to game consoles to cars. It has an unmatched manufacturing scale, with multiple semiconductor manufacturing plants (fabs) in Taiwan and one each in China and the US.
He has a long history of working with the Dutch firm ASML, which supplies TSMC with photolithography systems. These are used to project an integrated circuit design onto a silicon wafer and then etch it to create a physical chip. It’s a highly technical process, and having more than 30 years of experience, plus the scale of manufacturing, makes TSMC the most operationally efficient and probably the most reliable chipmaker.
Why did Buffett sell?
What has changed between November, when Berkshire’s position in TSMC was revealed, and now? It is unusual for Buffett to have sold around 86% of a stock just a few months after buying it. But it’s not just about Berkshire Hathaway’s sales. Other investment firms have also trimmed their positions, according to regulatory findings.
TSMC released its fourth-quarter results on January 20, 2023. Revenue, gross and operating margins, and earnings per share all increased from a year earlier, exceeding analysts’ expectations. That may not have been a reason to start selling. The semiconductor industry is highly cyclical, so perhaps there are concerns about shortages being seen as the world emerges from the COVID pandemic ending. If so, prices would fall and that would hurt the profits of factory operators. In addition, TSMC is building a new factory in the US and exploring opportunities to create new ones in Taiwan, Europe and Japan. Investors may be worried about overexpansion just as demand begins to wane.
But even so, it’s still unusual that Warren Buffett is selling, as he’s widely cited as having a favorite holding period of “forever“. It is usually insensitive to short-term results and cycles. So the sale suggests it could see problems with the long-term health of the semiconductor industry in general and TSMC in particular.
moore’s law
It’s getting harder and harder to downsize and cram more and more transistors onto a chip. So it’s getting more and more expensive to make them. TSMC is probably the lowest cost manufacturer, so it would seem like a sensible bet for the semiconductor industry in the long run.
Berkshire increased its position in Apple while trimming that of TSMC. So it seems that Buffett trusts the maker of the iPhone. He maybe he believes that Apple will bring its chip manufacturing in-house. There are rumors that this happens. If he did, he would cut TSMC’s revenue by 25%. But, until the Oracle of Omaha comes out and reveals why he sold, I can only speculate.
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