Warren Buffett Buys Taiwan Semiconductor Stock (NYSE:TSM). Should You?

Taiwan Semiconductors (NYSE: TSM) mission-critical, proprietary integrated circuit structures have become essential for numerous industries. That said, amid elevated risks regarding the cyclical nature of the companys business model and China continuously challenging Taiwans sovereignty, TSM stock has had a tough year. Thankfully, news broke out that Warren Buffetts Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) had invested more than $4.1 billion in the stock as of its most recent 13F filings. The news caused the stock to rally notably. With that, lets see what Buffetts investment signals about TSMs recent challenges and why I remain bullish on the stock.

Signal #1: TSMs Growth is Not Really Slowing Down

The first signal we can interpret from Mr. Buffetts investment is that Taiwans growth is set to remain robust, which in turn confirms that shares have been trading on the cheap lately.

This comes after elevated concerns regarding the cyclical nature of the semiconductor industry. Due to the ongoing rise in rates and worries over an economic slowdown likely to result in slumping consumer spending, investors have been speculating that TSM’s performance could suffer a strong blow over the short-to-medium term.

Yet, TSM has more than once disproved the market, as its essential role in the space, combined with robust demand for semiconductors, continues to lead to the company generating incredible numbers. Its Q3 results were no exception, as numbers came in incredibly confident, despite the ongoing macroeconomic and geopolitical turmoil.

Specifically, the company recorded sales of $20.2 billion, suggesting a year-over-year increase of 35.9% or a quarter-over-quarter increase of 11.4%. Surprisingly, these numbers even imply an acceleration in revenue growth from last quarters sequential revenue growth of 3.4%.

TSMs profitability once again exhibited the companys jaw-dropping margins. Margins were, in fact, expanded further, as TSMs gross margin was 60.4%, its operating margin was 50.6%, and its net income margin was 45.8%. These figures go up against last quarters 59.1%, 49.1%, and 44.4%, and last years 51.3%, 41.2%, and 37.7%, which highlight the companys economies of scale potential all across the board.

Accordingly, earnings per share jumped 65.7% to $1.79. Based on the companys year-to-date performance and managements outlook, I expect it to deliver earnings per share close to $6.40 for Fiscal 2022, implying a massive year-over-year growth of around 55%.

Mr. Buffetts investment in TSM does not mean that the company will sustain such incredible growth rates. However, it does imply, along with TSMs Q3 results, that growth wont be slowing as fast as many investors think.

We know that Mr. Buffett likes to buy quality companies at a discount, and my earnings-per-share estimate for the year indeed implies the stock is trading at a forward P/E of just under 13x (post the stock rally following Mr. Buffetts investment). Buffett can find plenty of companies trading at this multiple with much inferior growth prospects, so he would only consider TSMs elevated risk profile if growth is indeed set to remain vigorous.

Signal #2: Chinese Invasion Risk Less Likely Than Market Thinks

The second signal we can interpret from Mr. Buffetts investment in TSM stock is that Chinas escalating threats toward Taiwans sovereignty do not pose as high a risk as generally thought.

Sure, a potential war conflict would threaten the companys very own existence. Further, its not like Buffett has any extra insight regarding the situation than the rest of the market. That said, I do believe that Mr. Buffett has demonstrated that he makes rational decisions and assesses risk better than the average investor. Thus, this appears to be one of the times he acts advantageously when the rest of the market is in panic mode.

At the end of the day, Chinas threats have so far been just that: threats, and to miss out on an investment opportunity in such a one-of-a-kind company like TSM just because of threats may not be the smartest decision. Besides, the company is readying another multibillion-dollar plant investment in Arizona, diversifying further away from Taiwan, thus de-risking its geopolitical profile.

Is TSM Stock a Buy, According to Analysts?

Wall Street analysts have evolved increasingly bullish on Taiwan Semiconductor Manufacturings investment case. The stock has attracted a Strong Buy consensus rating based on five unanimous Buys assigned in the past three months. At $99.50, the average Taiwan Semiconductor Manufacturing price target implies 21.4% upside potential.

Takeaway: Buffetts TSM Investment is a Great Vote of Confidence

Mr. Buffetts investment in TSM constitutes a significant vote of confidence in the company, whose stock has been subject to severe headwinds lately. With its growth remaining impressive, risks of a Chinese invasion likely being overblown, and shares still trading at an inexpensive valuation, its easy to see why TSM makes for a fitting holding in Berkshires portfolio.

In fact, I wouldnt be surprised if we see further additions to this equity stake if shares remain undervalued.

Disclosure