1 Unusual Warren Buffett Growth Stock Down 34% to Buy in 2023

Savvy investors watch closely the purchases of Berkshire Hathaway, headed by investing legend Warren Buffett. And in the third quarter, the company initiated positions in three entirely new companies. While its investments in building materials manufacturer Louisiana Pacific and investment banking firm Jefferies Financial Group were familiar buys in the Berkshire investing mold and constituted relatively small investments, the third new portfolio addition was eye-catching.

Berkshire Hathaway purchased 60 million shares of Taiwan Semiconductor Manufacturing Company (TSM -0.18%), which was worth approximately $4.1 billion at the time of publication of the investment conglomerate’s most recent 13-F filing in November. The big buy made TSMC Berkshire Hathaway’s 10th-largest overall stock holding and marked the first time that it had held a position in a pure-play semiconductor company since it exited a small position in Intel back in 2012.

Read on to see why investors might wish to follow Buffett’s lead and build a position in this chip industry giant. 

Image source: The Motley Fool.

TSMC is a clear-cut industry leader

While Berkshire has warmed up to the technology sector in recent years, it’s well known that Buffett has preferred to avoid companies with highly complex, highly technical businesses. That makes TSMC something of an unusual portfolio component for Berkshire, as chip fabrication represents an extremely complicated corner of an extremely complicated industry. 

On the other hand, the Oracle of Omaha also famously prefers to invest in companies with strong moats, and that’s a quality TSMC has in spades. 

There are many companies out there that design their own semiconductors, and investors may be able to score big wins by backing one competitor in a category over another or identifying players that could be on the verge of big breakthroughs or product wins in valuable niches. But when it comes to actually manufacturing chips, one company dominates the field — and that’s TSMC. 

TSMC commands incredible technology, resource, and scale advantages, and it will be incredibly difficult for competitors to move in on its turf. The company has a stellar track record of delivering quality products on schedule, giving it reputational advantages in addition to technological superiority. Customers know that they can rely on TSMC to get their orders done right, and tech companies are rarely eager to test out a new supplier when crucial performance is on the line. 

The company accounts for an astounding 55% of global contract semiconductor manufacturing. When it comes to the much more profitable, high-performance chip market, TSMC’s dominance is even more pronounced. The fabrication giant controls more than 90% of the contract manufacturing market for the world’s high-end chips.

A fantastic business and attractive valuation

Spurred by strong demand in key categories and upgrades to new, high-performance chip nodes, TSMC has been posting impressive business results lately. Revenue in the company’s fourth quarter rose 26.7% year over year to reach $19.9 billion. For a hardware-oriented business, the fab giant also posts very strong margins. In Q4, the company recorded a gross margin of 62.2%, an operating margin of 52%, and a net profit margin of 47.3%. 

Despite the impressive performance, TSMC stock has fallen roughly 24% over the last year, and shares trade down roughly 34% from their lifetime high. Like many other tech stocks, the company has seen a big valuation pullback in conjunction with high levels of inflation, rising interest rates, and the possibility of an extended recession.

The company’s valuation has also been pressured by geopolitical factors, including the possibility that China will exert more control over Taiwan and the U.S.’ moves to ban certain manufacturing equipment and artificial intelligence (AI) chips from being sold to China. 

While the stock has regained some ground lately, the shares still look attractively valued — trading at roughly 16.4 times expected forward earnings. 

TSM PE Ratio (Forward) data by YCharts

TSMC also has appeal from a dividend perspective, with the stock yielding roughly 2% based on today’s share price.

Investors should move forward with the understanding that the semiconductor industry has historically been cyclical, and it’s likely that TSMC will see demand moderate in the event of a prolonged economic downturn. But the integration of chips into a wider array of products, the increasing digitization of the global economy, and ascendent technology trends including AI and cloud computing also appear to be moving the chip industry away from its traditional cyclicality and closer to secular growth. 

TSMC stands out as a top pick-and-shovel play for benefiting from the long-term growth of the global semiconductor industry. The stock might look like an unusual pick for Buffett and Berkshire Hathaway, but I think there’s a good chance that long-term investors will score wins by following Buffett’s lead on this one. 

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Intel, Jefferies Financial Group, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway, short January 2023 $265 calls on Berkshire Hathaway, short January 2025 $45 puts on Intel, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.