Analysis | Buffett’s TSMC Selloff backs Apple over its supplier

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Just months after announcing a massive stake in Taiwan Semiconductor Manufacturing Co., Berkshire Hathaway Inc. from Warren Buffett that it had dumped almost everything. By doing so, the world’s most famous investor may have left more than $1 billion in profits on the table, while revealing that even he may not be immune to macroeconomic jitters.

Berkshire held 60.06 million U.S. depositary receipts from the world’s largest chip maker, worth $4.12 billion at the time, according to a stock exchange filing at the end of September. By the end of the year, that number had fallen to 8.3 million. Berkshire hasn’t disclosed the prices it paid or received for these shares, but a quick look at TSMC’s stock price chart shows the timing was unfortunate: Shares were up 29% and hit a 10-month high earlier this week before news of the sell-off brought stocks down again.

So at current prices, instead of $5.8 billion in TSMC stock, Berkshire has a $765 million stake.

It’s hard to fault the Omaha-based company for getting nervous. TSMC’s US-listed shares fell 16% in the third quarter and only rose 8.7% in the next. At the time, interest rates were rising, the global economic outlook didn’t look particularly bright, and TSMC’s largest customer, Apple Inc., struggled with supply issues after an outbreak of Covid hit factories in China.

And for years, portfolio managers have been well aware that semiconductor stocks tend to rise and fall in tandem with the economic cycle. If a global recession was imminent, there were probably better bets to be made.

Rather than hold on to TSMC, Berkshire chose to dump it and keep its position in Apple, increasing its stake by just 333,856 shares. The iPhone maker remains Berkshire’s largest bet among reported holdings, with a current value of more than $137 billion. That’s not a terrible move; the stock is up 18% this year.

But now Buffett and Vice Chairman Charlie Munger face the same tough decision every other investor faces in these uncertain times: Will you invest in the world’s premier technology provider or will you continue to support its most important client, who happens to be the most valuable company in the world? world?

Earlier this month, Apple reported its biggest missed holiday sales in seven years, but Chief Executive Officer Tim Cook told investors that supply chain problems had eased and predicted consumers would be willing to “stretch” to buy an iPhone. to buy, even in uncertain times. time.

Two weeks earlier, TSMC predicted the first revenue decline in four years on a larger scale than analysts had expected. But like Apple, it painted a rosy picture. The second half of the year will be much stronger, it said, and it will deliver revenue growth for the full year. Posting growth during a recession is a tough job, so investors cheered that statement and sent the stock higher.

But they could be wrong and Berkshire right. With expensive but useful products, Apple is the ultimate consumer game. Should the economy be more robust than doomsayers believe, keeping the faith may ultimately be the wise choice. As if to prove the point, US retail sales rose 3% in January, the highest in two years and well above economists’ estimates for a 2% gain, data from the US Department of Commerce showed Wednesday.

In contrast, betting money on a cyclical industry with huge capital budgets that keep rising would simply be too risky for the Oracle of Omaha, especially if a strong economy justifies further rate hikes and thus higher borrowing costs. Every investment is a risk, so it could be that Berkshire just thinks the odds are better with the name it already knows.

Analysis | Buffett’s TSMC Selloff backs Apple over its supplier

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