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Last year, Warren Buffett’s fund, Berkshire Hathawayinvested more than $4.1bn into TSMC (NYSE:TSM). The share price of Taiwanese companies has had a terrible year, but here I think it could be the best stock for the next few years.
Energized by growth
Many chip companies see their top and bottom lines falling in 2022 as high inflation dampens demand for electronics. However, TSMC managed to overcome this trend and deliver very strong growth.
| Metric | 2022 | 2021 | Growth |
|---|---|---|---|
| net revenue | $75.88 billion | $56.82 billion | 33.5% |
| Dirty margins | 59.6% | 51.6% | 8.0% |
| Diluted earnings per share (EPS) | $6.57 | $4.12 | 59.5% |
In fact, since Berkshire announced its position, TSMC shares have risen more than 20%. In contrast, none of Buffett’s other investments have yielded greater returns over such a short period of time.
While analysts are uncertain about TSMC’s prospects in 2023, only guiding for single-digit growth, it should be noted that the stock market trades based on future cash flows. This means that the bad numbers of 2023 have been priced in. After all, CEO CC Wei expects the semiconductor decline to decline in H1 2023 before recovering in H2.
Eliminate the competition
Like the Oracle of Omaha, I personally invest in Taiwanese companies. This is for a variety of reasons, but mainly it is in a class of its own. The group is head and shoulders above the competition and looks to be widening the gap with the introduction of more compact and smaller power-saving chips.
TSMC expects to spend more than $32bn in capital expenditure (capex) to produce its groundbreaking 3nm chip. This is expected to be a golden nugget for the foreseeable future, as clients move to upgrade their products with better processors.
Having said that, the large amount of capex can weigh on EPS and it will grow negatively this year. However, I believe that TSMC will be able to overcome this due to its history of spending less than guided. For example, TSMC was guided to spend $42bn in capex last year, but ended up spending only $36.3bn. As a result, it is not surprising that spending is below the $32bn to $36bn guided for this year.
Smaller chips, bigger margins
As Warren Buffett says, “find companies with high profits”. And there is no better example than TSMC, which has seen its margins grow exponentially. The chip maker has managed its business well over the years – keeping operating costs stable while increasing free cash flow and earnings.
Consequently, this allows for a very strong balance sheet, which Warren Buffett and I are big fans of. With a strong debt-to-equity ratio, I am confident in TSMC’s ability to weather the prolonged decline in demand.
All that said, it’s worth noting that TSMC stock only has an average price target of $104. This represents only a 15% upside from the current stock price, which is not ideal for a growth stock. But since my intention is to invest beyond a one-year time frame, a smaller price target is irrelevant. The long-term upside potential of TSMC’s stock price is huge now, especially when considering the global economic rebound in 2024.
Even better, forward valuation multiples represent a bargain for tremendous growth potential. That way, I will buy more shares in time.
| Metric | Multiples of value | Industry average |
|---|---|---|
| Price-to-earnings (P/E) ratio. | 15.5 | 28.0 |
| Price-to-sales ratio (P/S). | 6.0 | 5.5 |
| Price-to-earnings growth (PEG) ratio | 0.2 | 1.2 |
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