Taiwan Semiconductor: Stock of the Week

Andrew Willis: In the lead-up to new restrictions on the export of U.S. semiconductor technology to China, Taiwan Semiconductor TSM was taking a tumble. For a solid month, the shares picked up their pace of descent, adding to their year-to-date losses. And then Buffett jumped in.

The stock leapt on news of Berkshire's BRK.B purchase, but do investors see what the Oracle sees?

On the surface, the new restrictions on advanced microchips are definitely a hit to sales. Ten percent of Taiwan Semiconductor's sales are to China, and their customers, like Qualcomm QCOM, AMD AMD, and Nvidia NVDA sell up to 30% of products to China. But as equity analyst Phelix Lee points out, Taiwan Semiconductor sees the rules as "limited and manageable," with customers managing by redesigning or rerouting products to achieve compliance, for example.

We see the restrictions leading to a halving of high-performance computing growth next year, and a third less growth in 2024. But what remains at the company now still looks very undervalued, especially considering the company sits atop a very difficult mountain to climb in the high-tech world, alongside only Samsung.

The ability to make five-nanometer chips--which power high-end data processing in things like the latest smartphones--takes an immense amount of money and time. Instead, companies like Apple AAPL may choose to pay a premium to be the first to use the technology from the independent chipmaker, and then it might trickle down to CPUs at AMD or automotive platforms at NXP NXPI. In the long run, it's not hard to see a market for high-performance computing and a lasting supplier ecosystem. At least Apple isn't likely to go to Samsung for the next iPhone anytime soon.

For Morningstar, I'm Andrew Willis.

The author owns shares of Berkshire Hathaway BRK.B.

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