Warren Buffett's first big semiconductor investment in his career is also a bet on Apple's future

Published Sat, Nov 19 20227:56 AM EST

Warren Buffett this week disclosed his first significant investment in semiconductors in his long career, and the value pick is seen as a way to double down on his No.1 stock — Apple . Berkshire Hathaway built a new, $4.1 billion stake in Taiwan Semiconductor in the third quarter, becoming the biggest holder of the Taiwanese chipmaker's American depositary receipts. The disclosure sparked a big rally in the stock as Buffett made Taiwan Semi Berkshire's 10th biggest holding at the end of September. Taiwan Semi is the biggest chip producer in the world by revenue, with clients like Nvidia and Qualcomm. The company is also the exclusive chip supplier for Apple, by far the most valuable stock holding in Berkshire's portfolio. TSM is the core supplier and linchpin of Apple's Silicon chips and this partnership is becoming more interwoven as Cupertino, Calif.-based Apple builds out its M2 chips, according to Dan Ives, senior equity analyst at Wedbush Securities. By betting on Taiwan Semi, Buffett is essentially backing the Apple ecosystem and iPhone demand in coming years, he said. "Taiwan Semi is the hearts and lungs of the Apple ecosystem," said Ives. "They build the chips, the silicon that are key in the iPhones, the Macs and really the future of Apple. It's about 25% of their revenue... when you are betting on TS, you are really betting on Apple." Buffett has increased his Apple stake to more than $120 billion over the years, taking up more than 40% of his portfolio. Buffett has called Apple Berkshire's second-most important business , after his cluster of insurance holdings. Even after the Buffett bounce, shares of Taiwan Semi are still down more than 30% this year as semiconductors slowed down and political tension in the South China Sea mounted. The U.S. is seeking to reduce reliance on Taiwan for chip supplies and cut off China from American-made chips. "I think Buffett betting on Taiwan Semi is really his view and it's our view that at least for now, the bark is worse than the bite in terms of political tensions," Ives said. "The reality is ... the semi food chain is cemented in Asia, in around China and Taiwan." Taiwan Semi can be regarded as a deep value stock, selling at less than 12 times forward earnings after hitting an all time low just earlier this month. To put that into perspective, the S & P 500 is trading around 17 times. 'Moat' Taiwan Semi has a unique quality that Buffett always looks for – and that is a competitive edge or the so-called wide moat. It is one of the few companies that produces semiconductors essential to advanced technology including artificial intelligence and electric cars. "I think one thing it has that certainly would attract Buffett and Munger is ... a moat, something that protects the company and allows the company to be competitive over the long term and earn outsized return," said Bill Stone, CIO at Glenview Trust Company and a Berkshire shareholder. "That's really unparalleled competence in making extremely complicated semiconductors." Meanwhile, the chipmaker offers robust cash flows and a fortified balance sheet that Buffett is often attracted to. The stock also pays a 1.7% dividend. "Taiwan Semiconductor has an extremely conservative balance sheet," Stone said. "They don't have a lot of debt so it's not the kind of company that you need to spend your nights worrying about going out of business if in fact we have a severe economic downturn."