Why Warren Buffett is investing in TSMC?

2022 is not an easy year for Taiwan Semiconductor Manufacturing Co (TSMC), the world’s largest and most valuable semiconductor company.

TSMC, the 35-year-old Taiwanese company that produced over 50% of the global chips for companies like Apple, Nvidia, and AMD, is suffering strong headwinds from the industry-wide growth downtrend this year. The shrinking demand, thanks to the derailing global economic outlook and escalated geopolitical tension, is seeing the chipmaker struggle.

As a result, its share price has plunged nearly 60% from US$145 in January to less than US$ $60 in October.

However, investors started to see the light at the end of tunnel this week.

Major catalysts for TSMC

Taiwan Semiconductor's shares rallied by more than 10% on 15 November after Warren Buffett's investment powerhouse Berkshire Hathaway disclosed that it had purchased a US$4.1 billion stake in the Taiwan chipmaker. Not only that, according to a filing in the United States Securities and Exchange Commission, from July to September, Berkshire Hathaway has already acquired about 60 million shares of TSMC.

With decades of impressive investment record, Warren Buffett is highly regarded as a legacy and strong believer in "value investing". His time-tested investment strategy is looking for the best-valued stocks with solid fundamentals and long-term growth potential. Hence, the highlight of TSMC in his investment portfolio has profoundly improved the sentiment for Taiwan's chipmaker, despite its share price just plummeting to a two-year- low.

Another positive catalyst is coming from TSMC's long-term client, Apple. The smartphone producer announced on 16 November that the company will reduce its reliance on Asian chips by sourcing from a factory in Arizona, US, potentially from 2024. This "Made-in-US" chip factory is currently under construction and confirmed to be run by TSMC, the exclusive supplier of Apple's custom Silicon chips.

In fact, TSMC is already planning for a second US facility to increase chip production outside its hometown as part of its long-term strategy in the face of escalated geopolitical tensions and entailed risks.

How did TSMC perform this year?

As the backbone of Taiwan’s economy and share market, TSMC’s business performance rarely lets its stakeholders down. Since 1994, TSMC has had a compound annual growth rate of 17.4% in revenue and a CAGR of 16.1% in earnings.

According to the company’s Q3 financial earnings reported in October, TSMC’s net revenue for the third quarter was US$20.23 billion, increased 35.9% from same quarter last year. More importantly, despite the heightened global inflation pressure, TSMC’s gross margin improved from 51% last year to 60.4% in Q3 2022, an enviable figure for its competitors.

In the area of technology development, TSMC continues to lead the market in the most advanced segment: 54% of total revenue comes from 7-nanometer and below wafer.

Currently, TSMC and Samsung are the only companies capable of producing the highest-end 5-nanometer chips that go into iPhones, whilst TSMC is one step ahead to plan on 3nm chips that will start production from Q4, 2022.

TSMC share price technical analysis

From a technical view point, the outlook from either the daily or the weekly picture has improved this week. The price is currently supported by the 100-day MA, sits around $77. The gap created this week ($74-$79) is set to be serving as a future support if the price continues to climb for the next days or weeks.

Another key level to keep a close eye on is the 200-week-MA in the weekly chart. This is a strong indicator for buyers to confirm the overturn of the stock’s longer term sentiment. If the price manages to overcome this hurdle, the next pressure level will be at $90, which is also a psychological threshold.