Yesterday, to my surprise, I already came across buildings and buildings being prepared for the end of year festivities.
After a certain age, this becomes worrying: after enjoying New Year’s Eve, going through another birthday, soon Christmas arrives. An astonishing speed.
When I was a child, it seemed like Christmas never came. The expectation of seeing the presents under the tree, left by Santa Claus, corroded the soul of this poor scribe.
Today, concerns are different. But I’m still being surprised by the good old man – just not the one who would arrive at the house by sleigh.
Last week, the Berkshire Hathaway (B3: BERK34 | NYSE: BRK/B)commanded by the investment genius Warren Buffettannounced its stock portfolio as requested by SEC (the American CVM). And, surprisingly, the Omaha wizard showed that his holding company had set up a position in Taiwan Semiconductor Manufacturing.
A true giant unknown to the general public, it is impossible to think of the world today without some of its products not being part of some electronics present in people’s daily lives.
Global semiconductor sales totaled US$555.9 billion in 2021, up 26.2% year-on-year due to strong demand driven by the Covid-19 pandemic.
According to World Semiconductor Trade Statistics, sales are expected to reach close to US$625 billion (+12%) in 2022; other associations indicate that the increase this year should be between 4% and 14%.
Since 1990, the United States have been the market leader, with almost 50% share in sales. It is important to point out, however, that this leadership takes place mainly in segments such as design (the company develops the chip but outsources its manufacture), intellectual property and production line equipment.
On the other hand, the manufacturing processes themselves are highly concentrated in Asia: 75% of the global production capacity, including manufacturing, assembly, testing and packaging of high-tech chips (7 nanometers) are in the continent.
And when we speak specifically of the foundry part (‘foundy’, in English), responsible for transforming raw materials into semiconductors themselves, Taiwan has a gigantic importance in this segment.
The island, with 36 thousand square meters and just over 23 million inhabitants, was responsible for 64% of the revenue in the world in 2021 – almost US$ 70 billion. South Korea, the second largest market in the segment, represents 18% of the total, with China closing the podium with around 7% of participation.
Figure 1. Market share by country (inner circle) and by company (outer) in the foundries segment in 2021 and 2022 | Source: TrendForce
And out of all the global manufacturers, TSM is by far the biggest. In 2021, the company’s revenue totaled US$ 56.8 billion (+18.5% vs. 2021), which represents 53% of market share. In addition, it is one of the few companies in the sector that already manufacture 5-nanometer semiconductors — because it is something with a lot of technology involved, large investments are needed, something that few can do.
Graphs 1 and 2. Taiwan Semiconductor Manufacturing Annual Net Revenue (upper graph) and Operating Cash Flow and Investments (lower graph) | Sources: Bloomberg and Empiricus
What did Buffett see on TSM anyway?
And this ends up generating a virtuous cycle for the company: as it is one of the few that manage to make the most advanced chips on the market, it is able to charge higher prices from its customers — added to the fact that it has a market share that allows it to have a relevant bargaining power with its customers.
With this strength in its capacity to grow the business (represented in the average growth of 17.5% in sales and 17.1% since 1994, the year of its listing on the Stock Exchange), it is not surprising that TSM has been investing more and more to Remain relevant in the industry: Over the last five years, the company has invested more than US$80 billion, an average of US$16 billion per year.
It is true that a possible action by China in the territory of Taiwan made many investors leave the paper (like us, in mid-June of last year). This point, incidentally, was reinforced with the Russian invasion of Ukraine, as many political analysts saw the hesitation on the part of global leaders to rebuke Vladimir Putin more forcefully as an excuse for Xi Jinping to feel comfortable doing the same.
But the Covid-19 pandemic and its impacts on global supply chains made several countries rethink their production lines, thus avoiding being at the mercy of events that were totally beyond their reach. And the semiconductor industry was no different.
In the case of the United States, in August President Joe Biden signed the CHIPS and Science Act, which offers incentives and investments in research to strengthen the American semiconductor industry. And since then, several companies in the sector have already announced that they are planning new plants in the Land of Uncle Sam.
According to the Semiconductor Industry Association, 46 new projects in the sector should be carried out in the coming years, totaling more than US$ 180 billion in investments. Also according to the association, among these projects are scheduled the construction of 15 new factories and expansion of another 9 in 12 American states.
Figure 2. Production plants of the semiconductor sector in the United States (blue) and new projects (purple) | Source: Semiconductor Industry Association
And TSM has already started the construction of a complex in the state of Arizona, valued at US$ 12 billion and whose inauguration should take place in December. The plant would have the capacity to produce 5-nanometer chips, but would already be adapting the project to make it possible to manufacture 4-nanometer semiconductors.
In addition to this project, the company has already signaled the possibility of a second plant in the region with the capacity to produce 3-nanometer chips, in which it should invest the same amount as the initial project. Not to mention the plants he intends to build in other countries like Japan, Singapore and even China.
It is important to note that, despite the non-negligible amount of such a position (almost US$ 5 billion, the ninth largest in the portfolio), this value does not even represent 2% of the almost US$ 350 billion invested in shares by Buffett and company.
Table 1. Top 10 Berkshire Hathaway Stock Positions | Sources: Berkshire Hathaway and Empiricus
Buffett’s view of the tech sector
But signage, in our view, is important. This is because we cannot forget that the largest position in Berkshire shares is in Apple (B3: AAPL34 | Nasdaq: AAPL), with more than US$ 138 billion invested, almost 40% of the portfolio. When you are an investor with a relevant percentage of the business, it is not difficult to imagine that discussions with the company’s executives reach another level, different from that to which normal investors have access.
Another point is that, according to Buffett, investing in technology stocks entails a greater degree of risk than he would be willing to take — which is why Berkshire’s portfolio is still full of names from the old economy, such as Bank of America, Coke and Chevron.
But the investor himself has already said that he made a mistake in not having invested in Apple before 2016, when the holding company first disclosed a position in the company. And not because he would have revised his idea of investments in technology, but because we are talking about one of the biggest consumer companies in history, with the iPhone being one of the most successful products of all time.
Although the company does not open such information, analysts point out that the company founded by Steve Jobs and currently commanded by Tim Cook is Taiwan Semiconductor’s main customer — almost 25% of the Taiwanese company’s revenue would come from Apple, which uses the chips in its entire product line.
Thus, it is inevitable to consider that these businesses are intertwined. Until the day that another company appears capable of offering the products made by TSM, or that a new device appears that displaces the iPhone. But this seems to be an unlikely scenario for the coming years.
Management expects to grow revenue in the range of 15% to 20% (in dollars) over the next five years, maintaining a gross margin above 50% and a return on equity above 25%. Considering Taiwan Semiconductor’s current valuation of 13 times its future profits, given the “moats” of the business (something always reinforced by Buffett) and how the company is adapting to suffer less from geopolitical issues in the coming years, strong devaluations such as the year (down more than 30%) seems less likely now.
Enzo Pacheco He holds a degree in Business Administration from the Federal University of Espírito Santo and a postgraduate degree in Financial Market Operator from FIA. An enthusiast of the subject of “investments” — having been interested since his university days —, since 2017 he has focused exclusively on the analysis of international markets in the Empiricus series dedicated to this purpose (Investidor Internacional and MoneyBets).
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