Should you buy TSMC stock? 2-minute analysis

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Warren Buffett just bought shares in TSMC and that news sent the stock up more than 10%.

Looking at the fundamentals, it’s easy to see why Buffett likes this manufacturer of microchips.

Microchips are essential to the modern economy. And they’re only going to become more important with the rise of electric vehicles and other technologies. And TSMC manufactures more than 90% of the world's most advanced microchips.

With 13.1 billion in net cash, TSMC has an enterprise value of 410 billion and the company made 71.7 billion dollars of revenue over the last 12 months.

Operating margins close to 50% mean the company brought in 34 billion in operating income and 30.6 billion after tax.

That means TSMC is valued around 5.7 times revenue and just under 14 times earnings. That’s pretty cheap for a company that has grown revenue 14% a year over the past 10 years and earnings per share mor e than 18% per year.

Margins have grown steadily too. Operating margins have increased over 10% since 2012 and they’re 4 times bigger than Intel

There’s no doubt that Buffett’s stake in Apple will have influenced this purchase in TSMC. The company makes chips for Apple’s products and Buffett will have first hand information about the company’s importance to the economy.

A key risk investing in TSMC is if China continues hostilities towards Taiwan. The company relies on parts made in mainland China and TSMC could end up in the middle of a tit for tat between the US and China.

The microchip industry is also inherently cyclical. Demand for smartphones has been slowing down while the supply of microchips has been increasing.

That’s another reason why TSMC stock is down -34% year to date.

But TSMC’s position outside of the US and China could provide some benefits and the company is simply too important to boycott. In fact, the NSA puts the economic consequences from the loss of TSMC at more than $1 trillion dollars.

Buffett clearly thinks the company is indispensable and at 14 times earnings the stock looks like good value.

If TSMC grows earnings at 15% a year for 10 years then trades at 20 times those earnings, the company would be worth around 2.5 trillion in 10 years time and that would mean an investment return of 19.7% a year.

So I rate this company a buy and I do own shares in the stock. But these are my personal opinions, not financial advice.

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