TSMC Bulls Ignore Buffett’s Warning and Stick to AI Bet

[Daniel Nenni]

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(Bloomberg) -- The frenzy over artificial intelligence is trumping geopolitical concerns over Taiwan Semiconductor Manufacturing Co., with its record stock rally powering ahead.

Foreign investors have boosted ownership of the stock to a two-year high, backing claims by TSMC that AI will be its biggest growth driver this year. The company has more than a 90% share in manufacturing advanced semiconductors used for AI, according to Pictet Asset Management.

The turnaround last year — the stock had plunged 27% in 2022 — came after Warren Buffett sold his $5 billion TSMC holdings, citing geopolitical tensions as the reason given its location. Adding to the concerns, the self-governing island elected a US-friendly president Lai Ching-te, putting in power a man Beijing has described as an “instigator of war.”

“While geopolitics have historically been perceived as a risk for the sector, the strategic nature of these products and the desire to build local supply chains means that arguably geopolitics has become a tailwind for the space,” said Bernard Ahkong, co-CIO at UBS O’Connor Global Multi-Strategy Alpha. “We are still at the earlier stages of this upcycle in semiconductors.”

The core concern about TSMC centers around its high concentration of chipmaking in Taiwan. The island produces the majority of the world’s advanced logic semiconductors, and any military escalations across the strait with China would be a heavy blow to the global supply chain.

Other than its dominance in advanced chips, it also has a more than 50% share of the overall foundry market, according to Pictet. That puts the company well on track to meet or exceed its long-term targets of 15-20% growth, said Anjali Bastianpillai, a senior client portfolio manager at Pictet.

The chipmaker’s revenue rose 9.4% in the first two months, as demand from rising AI activities accelerated, offsetting slowing iPhone sales. TSMC’s shares more than doubled from an October 2022 low, partly buoyed by gains in key customer Nvidia Corp. They rose 1.5% on Monday, extending the year-to-date rally to 29%.

Addressing the market concerns, the company is making progress in diversifying operation bases. TSMC has announced a plan to build a second fabrication plant in Japan, while its Kumamoto factory will begin production this year. The chipmaker is also building two advanced facilities in Arizona and one factory in Germany.

“Despite the geopolitical concerns, TSMC is a fundamental building block to gain exposure to AI and the broader recovery in semiconductors given the lack of companies with comparable quality in this space within emerging markets,” said Gary Tan, a portfolio manager at Allspring Intrinsic Emerging Markets Equity.

TSMC Bulls Ignore Buffett’s Warning and Stick to AI Bet

(Bloomberg) -- The frenzy over artificial intelligence is trumping geopolitical concerns over Taiwan Semiconductor Manufacturing Co., with its record stock rally powering ahead.Most Read from BloombergApple Is in Talks to Let Google Gemini Power iPhone AI FeaturesPutin Warns Russia Won’t Stop...

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[blueone]

Warren Buffett is a smart guy, but I've never understood his geopolitical risk concerns about TSMC, sufficient to cause him to divest TSMC stock, when he holds about $175B of Apple stock. It seems silly, and I can't remember WB ever looking silly other than this situation. And it's not just WB, it's his entire inner circle. I can't believe no one has educated him about semiconductor reality.

 

[Mooredaddy]

Warren Buffett is a smart guy, but I've never understood his geopolitical risk concerns about TSMC, sufficient to cause him to divest TSMC stock, when he holds about $175B of Apple stock. It seems silly, and I can't remember WB ever looking silly other than this situation. And it's not just WB, it's his entire inner circle. I can't believe no one has educated him about semiconductor reality.

This was my same reaction. It made no sense. Apple still craters to the center of the earth in a Taiwan invasion scenario as does the rest of the stock market because WW3 is likely on. And in that case why are you even trying to risk manage your portfolio when WW3 is on?

 

[Daniel Nenni]

This was my sake reaction. It made no sense. Apple stick craters to the center of the earth in a Taiwan invasion scenario as does the rest of the stock market because WW3 is likely on. And in that case why are you even trying to risk manage your portfolio when WW3 is on?

I would understand him not investing but investing then dumping it loudly seems sketchy. And yes it would be WW3. It is all politics. TSMC N3 has 90% market share so the list of companies who will crater is very long. N2 could be 80% but it is still huge. With TSMC building in Japan, the US, and EU the silicon shield only gets stronger. AI is a much bigger concern so hopefully we will start politicizing that for a while and give Taiwan a much needed break.

 

[hist78]

At the May 2023 Berkshire Hathaway annual shareholders' meeting, one of the shareholders asked Mr. Buffet what had changed that made him to sell the TSMC shares he bought just about six months earlier. During Berkshire's annual meeting, Mr. Buffet typically answered questions instantly. But that question caused him to pause several seconds.

He explained that although TSMC is a fine/great company, he doesn't like TSMC's Taiwan location.

This is the first time I feel Mr. Buffet's decision doesn't make sense or he got a bad advice.

Taiwan (Republic of China) and the PRC/CCP have been in a stalemate situation for the past 74+ years. The geopolitics and the threats of war across Taiwan Straight have been there all the time during these 74+ years. The situation he worried about was there 1, 3, 5, 10, 20, or even 30 years ago. If the bad situation has been there all the time, why he bothered to buy TSMC stocks in 2022?

Some people guessed Mr. Buffet changed his mind because he received a classified warning of the possible conflict. Again it doesn't make sense at all. Because if that is true, he should reduce (instead of promoting) his Apple holding ASAP. Currently Berkshire owns $176 billion Apple stocks. It represents 5.9% of Apple total shares and 20% of Berkshire's investment portfolio. Majority of Apple iPhones, iPads, Mac computers are made in mainland China. PRC is also the third largest Apple market behind US and Europe. If there is conflict around Taiwan, Apple will get severe and negative impact immediately.

Furthermore, around the same time Berkshire sold TSMC shares, it bought a lot shares of several large Japanese international trading firms' stocks. Mr. Buffet explained that Japan and Japanese economy are at the right location and right direction.

Again, it doesn't make sense. More than 90% of Japan's oil and gas import go through the sea around Taiwan. So do huge amount of Japan import and export.

Mr. Buffet's advisors forgot to tell him that the same geopolitics related to his decision to sell TSMC are also bad for Japan and bad for those Japanese trading firms he just switched to.

 

[Arthur Hanson]

An east west conflict of large size would disrupt the world economy as a whole and even China would suffer as they would be cut off from western and southern markets. A major conflict would hurt all, sort of starting a hand grenade fight in a small room, all would suffer.

 

[Xebec]

Warren Buffett is a smart guy, but I've never understood his geopolitical risk concerns about TSMC, sufficient to cause him to divest TSMC stock, when he holds about $175B of Apple stock. It seems silly, and I can't remember WB ever looking silly other than this situation. And it's not just WB, it's his entire inner circle. I can't believe no one has educated him about semiconductor reality.

The only thing I can think of is Warren has seen a LOT of conflict in south/east Asia in his lifetime.

He was a teenager during the later stages of World War 2, and saw the resolution of the Chinese civil war. He was in his 20s when the Korean War happened, and entering middle age at the conclusion of the Vietnam war. He’s witnessed a number of Indo-Pakistani conflicts. I suspect that is potentially coloring his thinking a little bit - comparatively, while the US has been involved in a lot of wars, there’s been almost zero total damage to the US mainland during his lifetime. Last but not least, he was even born before Bretton Woods made global trade a secure ‘standard’.

The China-Taiwan situation is a little bit different today too than just 10 years ago. The Chinese military is now fully controlled by Xi, the Chinese demographics aren’t looking sustainable, and the economy is no longer gaining double digits each year. China has proven it can reduce freedoms in Hong Kong without losing control. There is a lot of new risk.

While i don’t think TSMC/Taiwan is in any short-term danger, I suspect Warren is taking a much longer view than I am..

 

[blueone]

The China-Taiwan situation is a little bit different today too than just 10 years ago. The Chinese military is now fully controlled by Xi, the Chinese demographics aren’t looking sustainable, and the economy is no longer gaining double digits each year. China has proven it can reduce freedoms in Hong Kong without losing control. There is a lot of new risk.

I agree with you philosophically. I tend towards the we're-understating-the-risk end of the paranoia spectrum regarding Xi and his Taiwan agenda. My point, however, that it is illogical to worry about TSMC's share price due to China's potential actions, but keep a ginormous Apple investment, when for financial risk purposes TSMC and Apple are in the exact same category due to their extraordinary inter-dependence.

 

[Daniel Nenni]

While i don’t think TSMC/Taiwan is in any short-term danger, I suspect Warren is taking a much longer view than I am..

The question is: What changed in the world from the time Warren bought to the time he sold? The answer is nothing. Sketchy.

 

[hist78]

The only thing I can think of is Warren has seen a LOT of conflict in south/east Asia in his lifetime.

He was a teenager during the later stages of World War 2, and saw the resolution of the Chinese civil war. He was in his 20s when the Korean War happened, and entering middle age at the conclusion of the Vietnam war. He’s witnessed a number of Indo-Pakistani conflicts. I suspect that is potentially coloring his thinking a little bit - comparatively, while the US has been involved in a lot of wars, there’s been almost zero total damage to the US mainland during his lifetime. Last but not least, he was even born before Bretton Woods made global trade a secure ‘standard’.

The China-Taiwan situation is a little bit different today too than just 10 years ago. The Chinese military is now fully controlled by Xi, the Chinese demographics aren’t looking sustainable, and the economy is no longer gaining double digits each year. China has proven it can reduce freedoms in Hong Kong without losing control. There is a lot of new risk.

While i don’t think TSMC/Taiwan is in any short-term danger, I suspect Warren is taking a much longer view than I am..

If Mr. Buffet worries about the potential war/conflict between China and Taiwan, then Berkshire needs to exit out its huge stock holdings of Apple and several Japanese trading firms as soon as possible.

It makes no sense that the same threats he worries so much about will magically disappear from the Apple and those Japanese trading firms. It's not an issue of long term view vs short term view.

 

[VCT]

The question is: What changed in the world from the time Warren bought to the time he sold? The answer is nothing. Sketchy.

 

[Xebec]

If Mr. Buffet worries about the potential war/conflict between China and Taiwan, then Berkshire needs to exit out its huge stock holdings of Apple and several Japanese trading firms as soon as possible.

It makes no sense that the same threats he worries so much about will magically disappear from the Apple and those Japanese trading firms. It's not an issue of long term view vs short term view.

I’ve read that the ultra wealthy don’t usually expose more than 1% of their wealth to a single VC / high risk effort, and cumulatively no more than 10% of their wealth to (combined) high risk investments.

It could simply be that he assigns a ‘risk’ to this area of the world, and having heavy positions in both Apple and TSMC was too much risk at once. As for the short timing - maybe he does a risk analysis once per year and the analysis flipped after he bought TSMC.

We really don’t know what drove his change. It sucks for long TSMC holders but it is the nature of the stock game.