Warren Buffett is renowned for picking great stocks to buy. Apple, for instance, has spearheaded most of Berkshire Hathaway‘s gains in recent years. However, he’s also missed out on opportunities, such as Alphabet. With TSMC (NYSE:TSM) stock up 35% this year, has he made a mistake selling his shares?
A short fuse
Warren Buffett bought a sizeable amount of TSMC stock in Q3 last year, only to sell his entire stake in Q1 of this year. This was a rarity given Buffett’s philosophy of investing for the long term. Nonetheless, the Oracle of Omaha cited geopolitical concerns surrounding tensions between Taiwan and China for selling his stake.
Although Buffett thinks that TSMC is an extremely well-run company, he fears that a potential takeover of Taiwan from China could result in a war, which could spell very bad news for the world’s largest chip manufacturer.
That said, Warren Buffett’s decision to jump the gun so quickly on TSMC stock remains questionable. While there’s an element of truth behind his rationale for dumping the Taiwane fabricator, it’s also equally as confusing to see Apple as his biggest holding if he sold his positions based on geopolitical risks.
This is because Apple sources most — if not all — of its chips for its devices from TSMC. If an invasion were to occur, Apple would be equally as affected. But regardless of what Warren Buffett’s reasons were for selling TSMC stock, investors shouldn’t see the sale as a vote of no confidence necessarily.
Conducting a comeback
With the economy proving more resilient than initially forecast, analysts are now projecting explosive revenue growth in 2024. TSMC reported stellar results in its May update, growing sales by 19% — three times the historical growth rates for May, which is usually a slow period for the firm.
Perhaps more ironically, analysts are now expecting Warren Buffett’s favourite, Apple, to be the main catalyst driving TSMC’s gains in the near to medium term. Apple’s orders are projected to aid the group in recovering from its downturn, with a slew of orders expected in the second half of the year.
Aside from that, TSMC also has an incredible amount of pricing power due to its deep economic moat. As such, analysts are now anticipating price increases by as much as 6% in 2024. Because of this, sales growth of 22% is being priced in for 2024, with earnings per share growing by 25%.
Did Warren Buffett make a mistake?
TSMC’s top and bottom lines are now set to beat Apple’s by a landslide in 2024. Therefore, one could argue that Warren Buffett’s decision to sell his entire position in TSMC was a mistake.
Tensions between the US/Taiwan and China may have cooled in recent months. But it’s also worth noting that the overall geopolitical landscape can change in an instant.
Either way, I still rate TSMC stock very highly. I believe that a Chinese invasion of Taiwan would be counterproductive. It would do more harm than good for the Chinese economy, because China relies heavily on Taiwan for semiconductors to manufacture goods.
Thus, I believe Warren Buffett has made a mistake in letting go of his TSMC shares as he continues to invest in Apple, which presents the same risks. So, considering TSMC’s forward P/E of 16, I’ll be adding more to my position.
