Why did Warren Buffett sell his TSMC stock?

Yesterday, TSMC stock slid over 5% on news that Warren Buffett had drastically cut his position. Our writer considers possible reasons behind the move.

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Warren Buffett at a Berkshire Hathaway AGM

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Taiwan Semiconductor Manufacturing Company (TSMC) stock (NYSE: TSMC) is making headlines in the financial world. Yesterday, news broke that Warren Buffett’s Berkshire Hathaway sold billions of dollars of its stake in the company just a few months after buying it. The TSMC stock price ended up down 5.31% when the US market closed.

Semiconductor manufacturing

TSMC is the world’s largest semiconductor foundry. Its biggest client — accounting for around a quarter of its revenues — is Apple. And it has strong relationships with Apple and other customers that turn out everything from smartphones to game consoles to cars. It has an unrivalled manufacturing scale, with multiple semiconductor fabrication plants (fabs) in Taiwan and one each in China and the US.

It has a long history of working with the Dutch firm ASML, which supplies TSMC with photolithography systems. These are used to project an integrated circuit design onto a silicon wafer and then etch it to create a physical chip. It’s a highly technical process, and having 30+ years of experience, plus manufacturing scale, makes TSMC the most operationally efficient and probably trusted chip fabricator.

Why did Buffett sell?

What has changed between November, when Berkshire’s position in TSMC was revealed, and now? It is unusual for Buffet to have sold some 86% of a stock mere months after buying it. But it’s not just Berkshire Hathaway selling. Other investment firms have also cut their positions, according to regulatory findings.

TSMC released its fourth-quarter results on 20 January 2023. Revenue, gross, and operating margins and earnings per share were all up from a year earlier, beating analyst expectations. That can’t have been a reason to start selling. The semiconductor industry is highly cyclical, so perhaps there is concern the shortage seen as the world emerged from the COVID pandemic is ending. If so, prices would fall and that would hurt the profits of fab operators. Plus, TSMC is building a new fab in the US and exploring opportunities to create new ones in Taiwan, Europe, and Japan. Perhaps investors are worried about over-expansion just as demand starts to slide.

But even so, it’s still unusual that Warren Buffett is selling, as he is widely quoted as having a favourite holding period of “forever“. He is usually insensitive to short-term results and cycles. So the sale suggests that he might see problems 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 a chip. So it is becoming more and more expensive to manufacture them. TSMC is likely the lowest-cost manufacturer, so it would seem like a sensible long-term semiconductor industry bet.

Berkshire increased its Apple position as it cut its TSMC one. So, it seems Buffett is confident in the iPhone maker. Perhaps he believes that Apple will bring its chip manufacturing in-house. There are rumours of this happening. If it did, it would knock 25% off TSMC’s revenues. But, until the Oracle of Omaha comes out and reveals why he sold, I can only speculate.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James McCombie has no position in any of the shares mentioned. The Motley Fool UK has recommended ASML and Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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