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The renowned US investor, Warren Buffett, displayed a bearish sentiment towards the stock of the world’s largest chipmaker even prior to the second-quarter profit drop reported on Thursday. Berkshire Hathaway, his company, had previously revealed the sale of its remaining holding in Taiwan Semiconductor Manufacturing Company. However, investors have chosen to disregard Buffett’s bearishness, and there are valid reasons for their optimism.
In the second quarter, TSMC experienced a 23% decrease in net profit, amounting to T$181.8bn ($5.9bn). A decline in global demand for electronics, combined with the large chip inventories held by its customers due to last year’s global shortage, resulted in smaller orders for TSMC, negatively impacting its profits.
Further declines are projected for TSMC. The company anticipates a 10% sales drop this year, surpassing its earlier guidance of a single-digit decline. In the third quarter, operating margins could decline significantly to as low as 38%, a substantial decrease from the impressive 52% achieved by TSMC last year.
TSMC shares come with higher political risk than other companies in the industry. Warren Buffett cited concerns about Taiwan’s future as the main reason for selling his stake in the company. The recent sighting of 16 Chinese warships around Taiwan further highlights the escalating tensions in the region.
TSMC investors are aware of these factors. This partly explains why Lex, unlike Berkshire Hathaway, took a contrarian stance by selling TSMC in February. So far, this decision has proven to be profitable, with the share price rising by more than 10% since then.
Despite the challenges, there is still value to be found in TSMC. Its forward earnings multiple stands at 18, which represents a significant discount compared to global AI-related chipmakers like Samsung and Nvidia.
While this chip cycle may experience some volatility in the coming quarters, the longer-term trends are expected to prevail. More than half of TSMC’s sales come from advanced chips with a size of 7 nanometers or less. The demand for these chips will only grow as devices become increasingly sophisticated. Investors should view any weakness in TSMC’s performance this year as an opportunity.
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