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This Warren Buffett Holding Has Upside Potential

January 23
10:56 2023

With retail sales declining more sharply than expected during the holiday month and the third consecutive month of contraction in industrial activity, there is concern on Wall Street that the Federal Reserve may have overcooked it with respect to interest-rate hikes to cool down and contain inflation.

Amid widespread bearish sentiments, it could be wise to bank on fundamentally strong, profitable, and fairly-priced sector-leading businesses, such as Taiwan Semiconductor Manufacturing Company Limited (TSM).

Headquartered in Hsinchu City, Taiwan, TSM provides integrated circuit manufacturing services globally. This involves manufacturing, packaging, testing, and selling integrated circuits and other semiconductor devices.

The super-advanced semiconductor chips that TSM produces are difficult to fabricate due to their high development costs. Hence, this presents a significant barrier to entry into the competition.

On December 29, 2022, TSM held a 3 nanometer (3nm) Volume Production and Capacity Expansion Ceremony at its Fab 18 new construction site in the Southern Taiwan Science Park (STSP).

TSM announced that 3nm technology has successfully entered volume production with good yields. The company estimates that the technology will create end products with a market value of $1.5 trillion within five years of volume production.

On December 6, TSM updated that in addition to its first fab in Arizona, which is scheduled to begin production in 2024, it has also started the construction of a second fab, scheduled to begin production in 2026.

The overall investment for these two fabs will be approximately $40 billion. When complete, TSM Arizona’s two fabs will manufacture over 600,000 wafers annually, with an estimated end-product value of more than $40 billion.

On November 15, it was revealed that Warren Buffett’s Berkshire Hathaway (BRK.B) spent $4.1 billion to acquire a stake in the world’s largest contract chipmaker during the third quarter. According to SEC filings, the fabled conglomerate bought just over 60 million of TSM’s New York-listed American Depositary Shares at an average price of around $68.56.

Mirroring the positive developments, the stock has gained 16.9% over the past month to close the last trading session at $89.47

TSM is trading above its 50-day and 200-day moving averages of $77.44 and $82.48, respectively, indicating an uptrend.

Here is what may help the stock maintain its performance in the near term.

Solid Track Record

Over the past three years, TSM’s revenue has exhibited a 28.4% CAGR, while its EBITDA has grown at a stellar 33.4% CAGR. The company has increased its net income and EPS at a 42.1% CAGR during the same period.

Robust Financials

Despite the fourth quarter of fiscal 2022 ended December 31, characterized by end-market softness and customers’ inventory adjustment, TSM’s net sales increased 42.8% year-over-year to NT$625.53 billion ($20.63 billion), while its income from operations increased 77.8% year-over-year to NT$325.04 billion ($10.72 billion).

During the same period, TSM’s net income and EPS increased 78% to NT$295.90 billion ($9.76 billion) or NT$11.41 per share.

Continue Reading at INO.com

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