Stock Analysis & Ideas

Taiwan Semiconductor (NYSE:TSM): This Warren Buffett Stock Makes Perfect Sense

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Why did Warren Buffett’s company purchase millions of dollars worth of TSM stock? You don’t need to be a mind reader to see what the Oracle of Omaha would like about chipmaking giant Taiwan Semiconductor.

Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) CEO Warren Buffett isn’t known for delving into tech stocks very often. Yet, the Oracle of Omaha was willing to make an exception with Taiwan Semiconductor (NYSE: TSM). Like Buffett, I am bullish on Taiwan Semiconductor stock; the company is an industry giant with a decent yield and undeniable value, so the stock makes perfect sense.

Taiwan Semiconductor isn’t a household name in the U.S., but perhaps it ought to be. The company is, by far, the world’s biggest semiconductor manufacturer. No American chipmaker even comes close.

Still, many U.S. financial traders ignored TSM stock – until Berkshire Hathaway and Buffett got involved, that is. There’s no way to read Buffett’s mind and know exactly why he took a stake in a Taiwanese microprocessor maker. However, we can easily detect the features of Taiwan Semiconductor and TSM stock that would attract an investing legend like Buffett.

Buffett Likes Industry Leaders that Trade at a Discount

If you’ve been following Buffett’s investments over the years, you’ll find that he prefers big companies that are proven leaders in a particular field. Plus, he waits patiently until the stocks of these companies are trading at an undervalued price.

As it turns out, Taiwan Semiconductor fits this description perfectly. You might not have much experience investing in international businesses, but if you want to be like Buffett, you’ll definitely want to check out TSM stock.

Consider, first and foremost, that Taiwan Semiconductor is an industry leader with a market cap of $424 billion. So, you can go ahead and check that Buffett box. Next, Taiwan Semiconductor’s dividend yield is 2.3% on a forward basis (1.9% on a trailing-12-month basis), and that’s bound to catch Buffett’s attention as an income-focused investor.

Is TSM stock a “Buffett bargain,” though? It likely is, as the share price is nowhere near its 52-week high of $142.62. Moreover, Taiwan Semiconductor’s P/E ratio is extremely reasonable at just 13.7x. It’s not often that traders get to grab shares of a global market leader at such a low multiple.

Taiwan Just Passed Its Version of the CHIPS Act

Maybe you’re not convinced yet of TSM’s qualities. If you’re still skeptical, consider that Taiwan recently enacted a set of rules to take effect this year, which are similar to the incentives provided in the CHIPS Act by the U.S. government.

These new rules might not have a catchy name like the CHIPS Act, but they’re still a game-changer. According to a Bloomberg report, Taiwan’s recently enacted incentives “let local chip firms turn 25% of their annual research and development expenses into tax credits.”

Not only that, but Taiwan’s chip companies will also get to claim “tax credits on 5% of the annual costs of buying new equipment for advanced process technologies,” Reuters reports. This is with the proviso, however, that “any credits earned, however, cannot exceed 50% of the total annual income taxes a firm owes.”

Taiwan Semiconductor is a Powerful Revenue Grower

Now, we’re really starting to see why Buffett and Berkshire purchased over $4.1 billion of TSM stock. All of the pieces of the puzzle are in place: deep value, decent dividends, an industry leader, and a national government that favors the sector. To all of that, we can add the fact that Taiwan Semiconductor has strong momentum in its revenue growth.

Here’s the data if you’re still skeptical. During Q4, Taiwan Semiconductor’s revenue increased 43% year-over-year to the equivalent of $20.6 billion. Also, the company’s December sales grew 24% – not too shabby, and you can be sure that Buffett is paying close attention to these figures.

Besides, Taiwan Semiconductor achieved these results despite a global supply-demand imbalance of technology components. It just goes to show that Buffett has a keen eye for resilient companies, regardless of their location in the world.

Is TSM Stock a Buy, According to Analysts?

Turning to Wall Street, TSM comes in as a Strong Buy, based on five Buys and one Hold rating. The average Taiwan Semiconductor price target is $104, implying 27.2% upside potential.

Conclusion: It’s Time to Consider Owning TSM Stock

If TSM stock is good enough for Buffett and Berkshire, it could be good enough for you. Taiwan Semiconductor has everything a value investor could ask for and then some.

This doesn’t mean you should buy TSM stock just because Buffett’s company did. It’s encouraging to know, though, that investors of Taiwan Semiconductor have plenty of reasons to stay in the trade, as well as a legendary billionaire on their side.

Disclosure

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