TSMC: betting against Warren Buffett may pay off this time 

Receive free Taiwan Semiconductor Manufacturing Co Ltd updates

We’ll send you a myFT Daily Digest email rounding up the latest Taiwan Semiconductor Manufacturing Co Ltd news every morning.

Veteran US investor Warren Buffett turned bearish on the world’s largest chipmaker’s stock well before Thursday’s second-quarter profit drop. His company Berkshire Hathaway had already disclosed the sale of its remaining holding in Taiwan Semiconductor Manufacturing Company. Nevertheless, investors have bet against Buffett’s bearishness, and for good reason.

TSMC’s second-quarter net profit fell 23 per cent to T$181.8bn ($5.9bn). Weaker global demand for electronics, along with large chip inventories at its customers that stockpiled during a global shortage last year, have resulted in smaller orders. That has hit TSMC’s profits. 

Further declines are expected. TSMC forecasts a sales drop of a tenth this year, worse than its previous single-digit drop guidance. Operating margins could contract to as little as 38 per cent in the third quarter, a significant decline from the impressive 52 per cent TSMC ran on last year.

TSMC shares do carry higher political risk than its global peers. Buffett offers nervousness over the future of Taiwan as his main reason for selling out. A record 16 Chinese warships were spotted around Taiwan last week, in yet another sign of escalating tensions in the region.

TSMC investors know all this. That partly explains Lex’s contrarian stance to Berkshire Hathaway when it started selling TSMC in February. This has so far paid off. Since then, the share price has climbed more than a tenth.

There is still value to be had. TSMC trades at 18 times forward earnings, a significant discount to global AI-related chipmakers including Samsung and Nvidia.

This chip cycle needs a couple more quarters to bottom out. That could lead to some share price volatility for TSMC. But longer term themes should prevail. More than half of TSMC’s sales come from advanced chips — sized 7 nanometres or less. Demand for these will only grow as devices become ever more sophisticated. Investors should treat any weakness this year as an opportunity.