In a startling move, legendary investor Warren Buffett — via his conglomerate Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) — dumped a massive portion of holdings in chip contract manufacturer Taiwan Semiconductor (NYSE:TSM). Selling 51 million shares or 86% of its position, Berkshire left many analysts searching for answers. In response to the sharp decision, TSM stock dropped more than 5% in late-afternoon trading.
While it’s not unusual at all for enterprises to rebalance their investment portfolios, the jettisoning runs counter to Buffett’s philosophy. After all, the Oracle of Omaha once quipped, “[o]nly buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” In other words, Buffett encourages a long-term view as opposed to reactionary short-term tactics. This backdrop then makes the dumping of TSM stock all the more curious.
Notably, Berkshire did not provide a reason for the sale. Further, CNN attempted to contact the conglomerate, but it did not immediately respond to a request for comment. As well, Taiwan Semiconductor did not issue any statement regarding Berkshire’s exiting of TSM stock.
Naturally, the magnitude of the sell order caught Wall Street’s attention. “It’s surprising that Berkshire cut its holding so much in just a quarter, which differs from its past practice of long-term investment and continuing to add shares,” said Tony Huang, vice president at Taishin Securities Investment Advisory Co, in an interview with Bloomberg.
TSM Stock Presents Risks But Also Opportunity
Investors are now speculating on reasons why Berkshire may have dumped TSM stock. First, the obvious explanation centers on declining demand for personal computers and server chips relative to their pandemic-era peak valuations. Further, the specter of rising interest rates and stubbornly high inflation doesn’t bode well for the technology space.
Nevertheless, such a conclusion seems odd given Buffett’s long-term approach. Another potential explanation stems from deteriorating relations between Taiwan and China. In turn, the latter’s ambition to take over the island risks a military conflagration with the U.S. Keep in mind that, according to CNN, Taiwan Semiconductor accounts for an estimated 90% of the world’s super-advanced computer chips.
Finally, in response to broader U.S.-China tensions, Western-aligned governments pushed Taiwan Semiconductor to help build local production capabilities. In turn, the chipmaker plans to inject up to $3.5 billion in its Arizona-based subsidiary. Also, it’s considering opening its first plant in Europe and a second one in Japan. However, such efforts threaten to drive up costs, potentially negatively affecting TSM stock.
Still, Taishin’s Huang believes the fallout could represent an opportunity. “Many global investors continue adding its shares with its fundamentals improving, including better utilization rates and its leadership role in advanced technology,” he said.
Notably, Gurufocus’s discounted cash flow (DCF) analysis reveals that TSM stock is significantly undervalued. It estimates that TSM’s fair value stands at $171.79, implying a margin of safety of 46.17%.
Why It Matters
Although Berkshire’s dumping of TSM stock doesn’t instill much confidence, it’s important to realize that Wall Street still supports the underlying enterprise. As of this writing, the chipmaker commands a unanimous strong buy assessment. Further, analysts’ average price target stands at $104.33, implying nearly 13% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
