Why did Warren Buffett sell his TSMC stock?

Taiwan Semiconductor Manufacturing Company (TSMC) stock (NYSE:TSMC) is making headlines in the financial world. Yesterday, there was news that Warren Buffett Berkshire Hathaway sold a billion dollars of stock in the company just a few months after buying it. TSMC’s stock price ended down 5.31% at the US market close.

Semiconductor production

TSMC is the world’s largest semiconductor foundry. The biggest client – about a quarter of the profit – is Apple. And has a strong relationship with Apple and other customers who turn out everything from smartphones to fun games for cars. It has unparalleled manufacturing scale, with multiple semiconductor fabrication plants (fabs) in Taiwan and one each in China and the US.

I have been working with a Dutch company for a long time ASML, which provided TSMC with a photolithography system. It is used to project an integrated circuit design onto a silicon wafer and then etch it to create a physical chip. It is a highly technical process, and having 30+ years of experience, plus manufacturing scale, makes TSMC the most operationally efficient and probably reliable chip fabricator.

Is Buffett selling?

What has changed between November, when Berkshire’s position in TSMC was revealed, and now? It is not unusual for Buffett to have sold about 86% of his shares just a few months after buying them. But Berkshire Hathaway isn’t the only one selling. Other investment firms have also eliminated positions, according to regulatory findings.

TSMC released its fourth quarter results on January 20, 2023. Revenue, gross, and operating profit and earnings per share were all up from the previous year, beating analyst expectations. That cannot be a reason to start selling. The semiconductor industry is highly cyclical, so there may be concerns about shortages seen as the world emerges from the COVID pandemic. If so, prices will fall and it will hurt the profits of fab operators. In addition, TSMC is building new fabs in the US and exploring opportunities to build new ones in Taiwan, Europe, and Japan. Maybe investors are worried about further expansion when demand starts to decline.

But even so, it is still unusual for Warren Buffett to sell, as he is widely cited as having a favorite holding period”forever“. They are usually insensitive to results and short-term cycles. So the sale shows that they can see issues with the long-term health of the semiconductor industry in general and TSMC in particular.

Moore’s law

It becomes harder and harder to downsize and cram more and more transistors onto the chip. So it becomes more expensive to make. TSMC is likely the lowest-cost manufacturer, so it looks like a long-term semiconductor industry bet.

Berkshire boosts Apple position as it cuts TSMC. So, it seems that Buffett has faith in the iPhone maker. Maybe they believe that Apple will bring chip manufacturing in-house. There are rumors of this happening. If it does, it will cut 25% of TSMC’s profits. However, until the Oracle of Omaha comes out and reveals what they are selling, I can only speculate.