(Bloomberg) — For investors looking for a dip-buying opportunity in the global chip industry, Berkshire Hathaway Inc. may have a recommendation: Taiwan Semiconductor Manufacturing Co.
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Warren Buffett’s conglomerate acquired a $5 billion stake in the company last quarter amid a defeat that wiped out over $250 billion from the stock. It has not publicly commented on the deal, but market observers attribute the purchase to TSMC’s cheap valuations, technology leadership and solid fundamentals.
The purchase of Berkshire, along with a similar move by Tiger Global Management LLC, may indicate that value is emerging in the chip industry after a turbulent period marked by slowing demand and tensions between the U.S. and China. A growing number of Wall Street banks have renewed bullish views on TSMC, and analysts at Morgan Stanley said the stock has “met a good entry point.”
“With its superior technology leadership, TSMC is a great long-term value company looking beyond the current semiconductor downturn,” said Andy Wong, fund manager at LW Asset Management. “Buffett could invest in growth over the next decade given rising demand from IoT, renewable energy and automobiles.”
TSMC’s shares are up about 10% in Taiwan since its acquisition of Berkshire was announced last week. According to a Nov. 8 note, Morgan Stanley says they are trading below their downcycle rating at a discount of 30% to 40% due to geopolitical risks.
The stock has a valuation multiple of about 12.6x based on estimated earnings for next year, according to data compiled by Bloomberg. Goldman Sachs Group Inc. estimates that this is the lower end of the 10-year moving average. The company is cheaper than most members of the Philadelphia Stock Exchange Semiconductor Index, which tracks the largest U.S.-listed chip companies.
“We expect TSMC to continue to demonstrate its resilience against its peers given its superior execution during the industry downturn,” Goldman analysts wrote in a Nov. 16 note. Valuations are attractive and the company is best positioned to benefit from the industry’s long-term structural growth in 5G, artificial intelligence, high-performance computing and electric vehicles, they added.
TSMC has another advantage: It’s managed to deliver double-digit revenue growth and a gross margin well above 50% this year despite an industry slowdown. That has capped the stock’s year-to-date loss to 21% and helped it outperform peers like Micron Technology Inc. and SK Hynix Inc.
The Taiwanese company’s history of healthy cash flow and stable dividends may also have helped attract Buffett, according to analysts.
“TSMC (and other foundries) must invest heavily in the race for technology/capacity leadership, but history shows that TSMC has managed to generate respectable cash flows despite capital expenditures,” said Phelix Lee, equity analyst at Morningstar Asia Ltd. The company has had a track record of paying dividends since the 2000s, he added.
The stock’s most recent dividend yield is 2.6%, higher than Micron’s 0.8% and nearly on par with SK Hynix, according to data compiled by Bloomberg.
Though Buffett’s bet boosted retailers’ sentiment toward the stock, shares could continue to experience short-term volatility due to geopolitical risks and inventory adjustments in the chip industry.
The semiconductor sector is at the center of a widening rift between the US and China as the two nations battle for leadership in the global tech industry. Washington has imposed heavy sanctions on high-end chips made for Chinese customers to prevent them from getting into the hands of the Chinese military.
To reflect the risks, analysts have cut the average price target for TSMC stock by about 30% since February. Its US-listed shares are down over 30% this year, in line with the decline seen by the global semiconductor benchmark.
“Investors are concerned about above-average inventories that show no signs of easing just yet,” said Jason Su, fund manager at Cathay Taiwan 5G Plus Communications ETF. “Companies, including TSMC, said earlier that they expect the inventory correction to continue through the first half of next year,” he said, adding that chip inventories are likely to recover after inventory adjustments are complete.
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