Famous investor Warren Buffett created quite a stir the other day when his company, Berkshire Hathaway, revealed a new 60-million share stake in Taiwan Semiconductor Manufacturing (TSM 0.97%) worth $4.8 billion. The company bought so much it’s now one of its top-10 holdings.
As the world’s largest semiconductor foundry, Taiwan Semiconductor manufactures integrated circuits based on designs provided by its clients, including the likes of Advanced Micro Devices, Broadcom, Intel, and Nvidia.
Yet the industry has been mired in problems born of the COVID-19 pandemic, and shortages have been rife throughout the supply chain. Taiwan Semiconductor has also suffered as a result of the geopolitical tensions surrounding China and Taiwan, and its stock had lost some 40% of its value before the company reported better-than-expected third quarter earnings.
Over the past month, and combined with Buffett’s buy, the semiconductor stock has since climbed 27%, though its shares are still down 37% since the beginning of the year. With a market capitalization of over $350 billion, Taiwan Semiconductor needs to roughly triple from its current valuation to achieve trillion-dollar status. Is that feasible? Let’s find out.
An expanding global footprint
As noted, Taiwan Semiconductor counts some of the largest chip companies as customers. Because so many are U.S.-based tech stocks, last year it began construction of a $12 billion 5-nanometer chip fabrication plant in northern Arizona that should become operational in the first quarter of 2024 (TSM has had a presence in the state for 40 years).
It’s no coincidence that Apple recently announced that it will begin buying more of the chips it needs for its consumer electronics from a plant in Arizona that will become operational in 2024. Taiwan Semi already manufactures its A- and M-series processors, which are used in its iPhones and Mac computers.
In fact, demand from customers is reportedly so strong that Taiwan Semiconductor says it will begin constructing a second plant in Arizona. It’s also building a foundry in Japan.
It already generates over half of all global foundry revenue and owns 84% of the sub-10 nanometer chip market.
Out front and pulling away
For as much as Buffett really disliked technology stocks early on, he has grown increasingly comfortable investing in the space — Apple is his largest holding by far. It could be that he sees Taiwan Semiconductor in the same way: the dominant player in its field that few can touch, and that consumers absolutely rely upon.
That’s apparent in Taiwan Semiconductor’s third-quarter earnings report, which showed revenue jumped 36% to $20.2 billion while profits surged 80% to $8.8 billion. While much of the rest of the world was constrained by shortages, the semiconductor leader previously said it had not been impacted much by the sector’s downturn because long-term demand was “firmly in place.”
Trends such as the rollout of 5G networks, the advent and importance of data centers for housing company information, and the increased growth among consumer electronics and autos kept its factories humming along.
While it has struck a more cautious outlook today than it did after releasing its second-quarter report, trimming its expected capital expenditures for 2022 from $40 billion to $36 billion due to equipment delays, the long-term outlook for the chip stock remains bright.
Taiwan Semiconductor’s next closest competitor, United Microelectronics, is a distant second with just a 13% share of the market, and its next-gen N3 processor is generating such strong demand from the likes of Apple, AMD, and Intel that it is actually pressuring its engineering capacity.
The semiconductor industry is definitely a cyclical one, so Taiwan Semiconductor Manufacturing will certainly have ups and downs in the years to come. Yet barring China’s invasion of Taiwan, U.S. and China trade relations completely collapsing, or some other global calamity that makes us realize we have far larger problems to contend with than chip production, it seems a good bet Taiwan Semiconductor could readily become a trillion-dollar stock within the next decade.
Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Berkshire Hathaway (B shares), Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom Ltd and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), 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 (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), short January 2025 $45 puts on Intel, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.