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Will Warren Buffett’s stake in TSMC send its share price soaring?

TSMC has faced a turbulent last year. Though it recently reported an upturn in revenues, the company is facing global trade tensions amid major macroeconomic pressures. However, recent news that Berkshire Hathaway has taken a $4bn stake in the company has been a major boost in recent weeks.

- Tiger Global Management and Berkshire Hathaway have taken stakes in chipmaker TSMC, having made bullish statements on the stock.

- Global trade tensions could reduce TSMC’s revenue by 0.4% to 5% in 2023. 

- TSMC is the top holding in JPMorgan Emerging Markets Equity Fund A.

Hedge funds Tiger Global Management and Berkshire Hathaway [BRK-A] have recently purchase stakes in Taiwan Semiconductor Manufacturing Company (TSMC) [TSM], a Taiwanese chipmaker that has grown its revenues significantly over the past few years.

The increased institutional investor interest in TSMC shares has helped their price rise 28.6% in the past month, as revenue growth has remained resolute. In the company’s third quarter (Q3) results released last month, revenues were up 35.9% year-on-year, reaching $20.2bn. Margins have also remained exceptionally high, with gross margins over 60% in the Q3 trading update.

There are also positive signs that inflation may be getting under control. Indeed, prices at the wholesale level in the US rose 8% in October, lower than expected. However, geopolitical pressures between China and the US has threatened to derail some of the company’s progress, which has added pressure on the TSMC share price over the past year.

Hedge funds increase stakes in TSMC

Warren Buffett’s Berkshire Hathaway and Tiger Global Management have recently added shares of TSMC to their funds. Tiger Global Management has taken up 1.32  million shares of TSMC, while Berkshire Hathaway added a $5bn stake of TSMC into its portfolio this week.

Although details over why these hedge funds bought TSMC shares have not been disclosed, it is a positive sign for the firm. Andy Wong, a fund manager at LW Asset Management, stated that “Buffett could be investing in the next decade growth with burgeoning demand from IoT, renewable and automobiles”. TSMC is one company primed to take advantage of this.

The semiconductor company is facing geopolitical tensions, however, with the US having recently banned unlicensed sales of certain semiconductors and manufacturing equipment to China. This includes chips made by foreign firms, such as TSMC. This would severely hinder growth and restrict TSMC’s flexibility, especially as China claims sovereignty over Taiwan, and TSMC is a Taiwanese company. Analysts at Bernstein have predicted that TSMC could lose between 0.4% and 5% of revenues in 2023.

 

Exposure to the smartphone industry

TSMC has a 56% market share in the global semiconductor foundry market, which cements the company as the largest industry player. Approximately 40% of the TSMC’s revenues come from making chips for the smartphone market, with its largest customer being Apple [AAPL]. Other large customers include MediaTek [2454.TW], AMD [AMD], Qualcomm [QCOM] and Nvidia [NVDA].

The company generates approximately 65% of its revenues from North America.

There are some signs that it can expand this market even further. It recently announced that it was constructing a plant in Arizona, set to begin production in 2024. This new factory is also expected to serve TSMC’s relationship with Apple, and is likely to increase business for the chipmaker.

However, the semiconductor industry is also highly cyclical, alternating between periods of oversupply and shortages. TSMC will need to ensure its ability to maintain prices in periods of oversupply.

Funds in Focus: JP Morgan Emerging Markets Equity Fund

TSMC is the biggest holding of the JPMorgan Emerging Markets Equity Fund A [JFAMX], making up 6.9% of the fund as of 31 October. The fund aims to invest mainly in countries outside of the US, with 24.9% of the fund made up of Indian companies, 21.6% of companies based in China and 10.7% of those in Taiwan. Although it has fallen 27.1% in the past year, it has climbed 10.9% in the past month.

Another fund that holds TSMC is the First Eagle Global Fund Class A [SGENX], a fund that aims to invest in companies undervalued by investors, following the advice of Warren Buffett. While the primary holding of the fund is gold bullion, TSMC makes up 0.66% of the fund. In the past year, the fund has also outperformed markets, falling a relatively modest 6.5%. In the past month, it has risen 8.6%.

 

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