Warren Buffett urges investors to be “greedy when others are fearful,” and his company, Berkshire Hathaway (BRK.A 0.95%) (BRK.B 1.27%), has undoubtedly listened. Berkshire Hathaway was an active buyer of stocks in 2022, with one of its most recent purchases being Taiwan Semiconductor Manufacturing (TSM 0.63%).
Berkshire has loaded up on shares of Taiwan Semi, according to its most recent 13F filing, buying over 60 million shares worth $4.1 billion. After this large purchase, Taiwan Semi is now Berkshire’s 10th largest position, making up 1.4% of the company’s investment portfolio. With Berkshire loading up on shares, should you? Let’s find out.
Taiwan Semiconductor’s valuation is unreal…
One of the likely reasons that Berkshire bought billions of dollars worth of Taiwan Semi stock is because of the company’s valuation. Taiwan Semi is trading at a rock-bottom multiple of 13.3 times earnings. That’s the cheapest valuation for the company since 2016! It’s also lower than the company’s average valuation over its lifetime as a public company — Taiwan Semi has traded at an average price-to-earnings multiple of 22.4 since 1994.
This is despite the company’s incredible dominance in the semiconductor space. Taiwan Semi is the largest chip foundry in the world, with 57% market share in 2021, according to Gartner (IT 1.72%). In other words, Taiwan Semi provides over half of the world’s chips, including all of Apple‘s (AAPL 2.11%) iPhone chips. As a result, Taiwan Semi has generated $71.7 billion in revenue along with $17.2 billion in free cash flow over the trailing 12 months.
It won’t be surprising if this leadership position is sustained for the long haul, either. Taiwan Semi produces some of the most innovative chips in the world. This requires lots of capital, plus heavy investments in research and development. In the first nine months of 2022, for example, the company spent over $4 billion on research and development and nearly $25.5 billion on buying property and equipment.
There are only a select few businesses that have the ability to spend this much money to produce the gold-standard chips at the scale that Taiwan Semi does, making it difficult for any other rival to achieve this level of scale.
But there’s a reason for this
At this valuation, Taiwan Semi might seem like a no-brainer investment. However, shares have plummeted because of a significant risk: China. The threat of China invading Taiwan has spooked investors. It’s not an irrational concern, either. Taiwan Semi has 15 of its 16 fabrication facilities in Taiwan and China, so if China were to invade and temporarily suspend activity in these facilities, the company’s production would slow dramatically.
However, Taiwan Semi is investing heavily in diversifying its production capabilities. The company recently announced plans to invest $40 billion in building two new fab facilities in the United States. These fabs aren’t scheduled to begin production until 2024 and 2026, but it signals that Taiwan Semi is decreasing its reliance on Taiwan alone and that the company is diversifying its production capabilities.
Is the risk worth the potential reward?
It’s hard to ignore this dirt-cheap valuation for a company as vital to the global economy as Taiwan Semi is, but the risk of Chinese invasion inhibiting production isn’t something to brush over. The uncertainty is high for this investment, but so is the reward.
It’s important to remember that this semiconductor stock wouldn’t be the only stock getting sold off if this event occurred. Given Taiwan Semi’s indispensability to the entire world, many businesses — including giants like Apple — would suffer if this risk played out.
This investment is risky and isn’t for the faint of heart. However, for investors willing to take on uncertainty to own a leader in a vital industry with incredibly robust competitive advantages, it certainly looks attractive right now. Buffett seems to agree, and if you have a diversified portfolio, this might be a pitch worth swinging at this year.
Jamie Louko has positions in Apple and Berkshire Hathaway. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Gartner and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway, short January 2023 $265 calls on Berkshire Hathaway, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.