TSMC bulls ignore Warren Buffett’s warning for bet on coming artificial intelligence age

(Bloomberg) -- The frenzy over artificial intelligence is trumping geopolitical concerns over Taiwan Semiconductor Manufacturing Co., with its record stock rally powering ahead. Foreign investors have boosted ownership of the stock to a two-year high, backing claims by TSMC that AI will be its biggest growth driver this year. The company has more than a 90% share in manufacturing advanced semiconductors used for AI, according to Pictet Asset Management.

The turnaround last year — the stock had plunged 27% in 2022 — came after Warren Buffett sold his $5 billion TSMC holdings, citing geopolitical tensions as the reason given its location. Adding to the concerns, the self-governing island elected a US-friendly president Lai Ching-te, putting in power a man Beijing has described as an “instigator of war.”

“While geopolitics have historically been perceived as a risk for the sector, the strategic nature of these products and the desire to build local supply chains means that arguably geopolitics has become a tailwind for the space,” said Bernard Ahkong, co-CIO at UBS O’Connor Global Multi-Strategy Alpha. “We are still at the earlier stages of this upcycle in semiconductors.”

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The core concern about TSMC centers around its high concentration of chipmaking in Taiwan. The island produces the majority of the world’s advanced logic semiconductors, and any military escalations across the strait with China would be a heavy blow to the global supply chain. 

Other than its dominance in advanced chips, it also has a more than 50% share of the overall foundry market, according to Pictet. That puts the company well on track to meet or exceed its long-term targets of 15-20% growth, said Anjali Bastianpillai, a senior client portfolio manager at Pictet.

The chipmaker’s revenue rose 9.4% in the first two months, as demand from rising AI activities accelerated, offsetting slowing iPhone sales. TSMC’s shares more than doubled from an October 2022 low, partly buoyed by gains in key customer Nvidia Corp.

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Addressing the market concerns, the company is making progress in diversifying operation bases. TSMC has announced a plan to build a second fabrication plant in Japan, while its Kumamoto factory will begin production this year. The chipmaker is also building two advanced facilities in Arizona and one factory in Germany. 

“Despite the geopolitical concerns, TSMC is a fundamental building block to gain exposure to AI and the broader recovery in semiconductors given the lack of companies with comparable quality in this space within emerging markets,” said Gary Tan, a portfolio manager at Allspring Intrinsic Emerging Markets Equity.