On November 14, 2022, Warren Buffet’s Berkshire Hathaway (NYSE:BRK.A) reported a new investment in its quarterly 13-F filing, indicating a 60.1 million share stake in one of the world’s most dominant semiconductor manufacturer Taiwan Semiconductor Manufacturing Company (NYSE: TSM) stock. This caused the shares to skyrocket 10%. While his $4.1 billion stake only accounts for just over 1% of outstanding shares, it’s his actions that have led to a rally in TSM and semiconductor stocks. His reputation as one of the greatest investors of all time brings an immediate premium to the companies in which he invests. Numerous fund managers and private investors follow his every investment move and usually follow him into positions after they are disclosed in SEC filings. TSM shares rose more than 10% on the news. Before chasing stocks, it’s wise to analyze the company’s underlying business. Taiwan Semi has brought capacity back online to improve the global semiconductor supply chain and is running at full capacity.
The world’s largest chip maker
Taiwan Semiconductor is a contract computer chip maker. It owns manufacturing plants (FABs) that manufacture chips to customer specifications. Fabs are notoriously expensive and time consuming to build. Intel (NASDAQ:INTC) produces its own chips through its own factories and plans to strengthen its contract business. Taiwan Semi produces nearly 80% of the world’s semiconductors for some of the most famous brands such as Apple (NASDAQ: AAPL), the largest customer, Applied Micro Devices (NYSE: AMD), Broadcom (NASDAQ: AVGO), Marvell Technologies (NASDAQ : MRVL), MediaTek, Qualcomm (NASDAQ: QCOM), and Nvidia (NASDAQ: NVDA). The company is extremely profitable with a gross profit margin of 57.3%. The pandemic lockdowns and subsequent reopenings boosted demand for chips while supply was scarce as factories were taken offline and had to be put back into production. This was the main reason for the supply chain disruption that forced automakers like Ford Motor (NYSE: F) and General Motors (NYSE: GM) to slow down their production of new cars due to the shortage of computer chips. The supply chain has improved as production capacity has returned to normal. The company plans to build another multibillion-dollar plant in Arizona in addition to the $12 billion investment it committed two years ago, according to The Wall Street Journal.
Firing on all cylinders
On October 13, 2022, Taiwan Semi announced its third quarter 2022 fiscal results for the quarter ended September 2022. Financials were reported in New Taiwan dollars or NT$. The company reported earnings per share (EPS) of NT$10.83 excluding one-time items versus consensus analyst estimates for earnings of NT$10.39, a profit of NT$0.44. Revenues increased 47.9% year over year (YoY) to NT$613.14 billion, beating analyst estimates of NT$607.97 billion. Demand was driven by strong demand for the 5-nanometer (N5) technologies.
CC Wei, CEO of Taiwan Semi, commented, “Looking forward to 2023 with the successful launch of N5, N4P, N4X and the imminent ascension of N3, we continue to expand our product portfolio for customers and increase our addressable market. While the ongoing correction in semiconductor inventory will affect capacity utilization in the first half of 2023, we expect our business to be supported by stronger demand for our differentiated and industry-leading advanced and specialty technologies, and 2023 to be a growth year for TSMC. ” N3 is expected to increase volume in 2023 as demand exceeds supply. N3 revenues in 2023 are expected to outperform N5 sales in year one 2020. He added, “Our 3-nanometer technology will be the most advanced semiconductor technology in both PPA and transistor technology when it is introduced. We are confident that the N3 family will again be a great and long-lasting hub for TSMC.” Smartphones and high-performance computing (HPC) are driving demand.
Investors should be aware of the geopolitical tensions between China and Taiwan and the US. China believes that Taiwan is a province of the People’s Republic of China (PRC), but that Taiwan has been an independent country as the Republic of China (ROC) since 1949. Since Taiwan produces the bulk of the world’s computer chips, the US has an interest in Taiwan’s independence as a trading partner under democratic rule. So far it has been a battle of words, but an invasion of Taiwan by China is a possibility that cannot be ruled out. The Biden administration has introduced semiconductor restrictions in China, which will affect sales of artificial intelligence (AI) chips from AMD and NVDA in 2023. The government signed the $50 billion CHIPS and Science Act in October 2022 to strengthen US semiconductor manufacturing by investing in manufacturing facilities .
Year-long weekly downtrend channel reversal
On the weekly candlestick chart, TSM has been in a weekly downtrending channel since February 2022, rejecting twice the falling weekly 20-period exponential moving average (EMA). The stock hit a weekly swing low and monthly double bottom near $59.75. The weekly stochastic coiled up through the 20 band like a spring, driving the weekly market structure low (MSL) above $63.43. TSM finally broke through the weekly 20-period EMA resistance at $77.04, but the 50-period MA resistance continues to drop to $94.34. Volume soared on the 13-F filing, pushing short sellers while buyers chased stocks higher. Pullback support levels to watch sit at $74.92, $67.73, $63.43 weekly MSL trigger, $58.75 monthly double bottom and $52.53.