Have investors still got chips on plate?: Global instability may force a rethink

The Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest maker of ultra-fast microchips that power cars, computers, phones, and just about every other part of modern life.

Such is the potential additional demand for its products from AI, electric vehicle and renewable energy operators that legendary investor Warren Buffett has snapped up £3.3bn worth of shares.

This may be small change for his £565bn Berkshire Hathaway fund. But is it still a message that TSMC, dubbed ‘the enabler of future technology’ by Morgan Stanley, is a bargain buy?

Or does TSMC’s position at the center of the Sino-US tech cold war make the geopolitical challenges insurmountable, especially given the implications of the unrest in China?

TSMC, the world’s ninth-largest publicly traded company, commands a 53 percent market share, thanks to its knowledge, skilled workforce and buying power, the kind of traits Buffett seeks. It requires companies to have a wide ‘economic moat’ that can repel competition.

A 110-mile-wide strait separates Taiwan from China. But the largest neighbor claims Taiwan as its own, prompting The Economist magazine to call the island “the most dangerous place on earth.”

Protests over covid protocols in major Chinese cities that sent tremors to markets could prompt Beijing to intensify its threats against Taiwan as a show of its overall authority.

This week our Prime Minister Rishi Sunak said that the golden era of UK-China relations is over. But tensions between China and Western nations have already escalated over the policies of US President Joe Biden.

The new Law on Chips and Science aims to limit the supply to China of advanced chips for use in artificial intelligence or military purposes. The US is also seeking to reduce its dependence on Taiwan by providing subsidies to companies that make chips in the US.

In 1990, the United States accounted for 37 percent of global chip production, but now it’s 12 percent, even though it is the world’s second-biggest customer for all kinds of chips, after China.

Recent protests in China have disrupted markets due to risks to global supply chains, though Beijing may have to change its stance.

Philip Shaw, Investec’s chief economist, comments: ‘There is a clear conflict between politics and China’s need to rescue its ailing economy. The campaign to improve vaccination rates is now going to be crucial.’

The damage caused by the protests to TSMC and others is a factor in the 32 percent drop this year in the PHLX semiconductor index.

ASML, Broadcom, Intel, Nvidia, and Qualcomm are among the other big names.

TSMC shares are 21 percent below their January level, though Buffett’s intervention brought a rebound.

This will come as a relief to fund holders such as Baillie Gifford Positive Change, Franklin Templeton Emerging Markets and Fidelity Asia who have stakes in the company.

Chetan Sehgal of Templeton Trust says: “We continue to believe that TSMC is among the best stocks emerging markets have to offer.”

Recent protests in China have destabilized markets due to risks to supply chains

But anyone thinking of following Buffett like me should consider whether the geopolitical slide and bear market cycle caused by the global slowdown are satisfactorily reflected in the current price.

TSMC, whose market capitalization is NT$12.6 trillion (£330bn), is valued at just 12.7 times forecast earnings.

Andy Wong of LW Asset Management, the Hong Kong wealth manager, thinks it’s “a great value long-term play,” a view that appears to be based on Morgan Stanley’s forecast that the market will pick up in the second quarter. half of 2023.

TSMC has 17 plants, 15 in Taiwan, two in China, and is building a £10bn plant in Phoenix, Arizona, which is rumored to be able to supply Apple by 2024.

Apple accounted for a quarter of sales in 2021. Customers could also count on Tesla, and a second plant in the state is a possibility.

Phoenix is ​​about 1,300 miles from Berkshire Hathaway’s headquarters in Nebraska. Buffett would admit that he is some distance from understanding the technologies behind chipmaking.

But he seems convinced of the need for these components and the profits on offer: TSMC’s operating margin is around 50 percent.

Investing in this dangerously located company is risky, but sometimes that’s part of the fun, so I’ll look to add other chip stocks like Nvidia, down 48 percent this year.