When Bill Gates met Warren Buffett for the first time, Gates tried to convince the Sage of Omaha of the merits of investing in technology. As the story goes, Buffett would re-direct the conversation towards everyday consumer habits, like chewing gum and eating ice-cream. Those behaviors would continue, in Buffett’s view, and so those businesses would be good ones for the long-term. It’s no surprise then that Buffett owned Dairy Queen and See’s Candies.
But that was then and this now.
Fast forward to today and you’ll see Berkshire Hathaway’s stock portfolio has evolved to include many technology stocks. Indeed, his largest holding by a country mile is Apple. He’s even ventured into buying unprofitable companies like Snowflake pre-IPO. It’s an astonishing turnabout in investment philosophy from the Oracle of Omaha. But perhaps, his latest move trumps all the others.
What did Buffett just buy?
Shocking New Purchase
In its latest filings, Berkshire Hathaway announced a new billion dollar position in TSMC semiconductor. Manufacturing semiconductors is a notoriously challenging endeavor. The slightest dust particle can destroy a multi-million dollar chip. Chip manufacturers are about as advanced as any technology on earth, and TSMC is the leader.
If you wanted to set up a specialty design house in Silicon Valley to build chips, your first port of call would be to TSMC to get it manufactured. And you could do so reliably. But TSMC has not only captured a vast array of “smaller” customers, such as those boutique design houses, but also many of the largest players, too, rely on them; Apple and Qualcomm for example.
Still, that story has been known for some time, so why did Buffett buy TSMC now?
The first thing to notice is Buffett’s 60 million share purchase amounts to a $4 billion bet on TSMC, catapulting it instantly to a top 10 holding. It’s rare that any manager buys such a big stake so quickly and suggests Buffett has enormous conviction in the buy.
To understand Buffett’s thinking we need to go back in time to examine his holding of airline stocks.
Famously, Buffett excoriated airlines as a terrible business, even though it’s a wonderful technology. He waited decades for most of the carriers to go bust until just four remained.
Then he didn’t pick among them; that would be too risky.
Instead, he bought all four, figuring that demand would be constant, even if one ran into trouble – another of the three remaining could scoop up the pieces. The lesson is Buffett bought the “whole pie” (all airlines) not just a slice of it (a single airline).
Similarly, his purchase of TSMC is most likely connected to his thesis on Apple, an end customer of TSMC.
Probably nobody but Tim Cook has better insights than Buffett into the customer retention Apple enjoys, the path to grow, and the stability of demand. And if Apple relies heavily on TSMC, so too can TSMC rely on all those same growth vectors. Indeed, Buffett may be aware that Apple will need to rely even more heavily on TSMC in the years to come should it launch a much-rumored Apple Car.
A single thesis isn’t enough to persuade Buffett to buy, however, if the financials aren’t appetizing.
The correction in TSMC share price this past year opened up a window to buy shares at an attractive valuation.
By our calculations, TSMC is fairly valued at around $96 per share, suggesting 17% upside at the time of research.
Cash flows are healthy, growth is attractive, and profits are compelling. Add those attractive financials to a compelling investment thesis tied to Apple, Buffett’s largest position, and you can see why Buffett was willing to take the plunge on a Taiwanese chip manufacturer.