Could Selling Taiwan Semiconductor Be Buffett’s Biggest Regret?

Key Points

• Warren Buffett might have sold out too early from Taiwan Semiconductor stock, leaving a lot more gains on the table for the coming years.
• The company's financial makeup is still just as attractive as ever, setting up for value compounds.
• Today, Wall Street analysts and institutional buyers recognize a discount.

Warren Buffett is one of the most respected and widely followed investors in modern financial markets. He has a track record of success that spans several decades and recently showcased his ability to time his exits ahead of what turned out to be a near-record month in terms of volatility for the S&P 500 index.

While his success rate is high enough to justify his fame, one decision might weigh on him in the coming years.

That decision was to sell out of one of the leading stocks in the technology sector, not just in the United States but globally, as this company owns and operates the vast majority of the chips and semiconductor supply chain and logistics worldwide. 

Perhaps anticipating the potential effects of trade tariffs, or otherwise looking to avoid some geopolitical tensions overall, Buffett’s sale of this industry leader might become a regret later.

The stock in question is Taiwan Semiconductor Manufacturing NYSE: TSM.

As investors will find out shortly, this stock is just as attractive today as when Buffett first took an interest—if not more so. Its importance has only been amplified, while its relative discount to all-time highs offers investors a fantastic risk-to-reward ratio in today’s volatile environment.

Taiwan Semiconductor Stock’s Discount: Just as Good

There is one undeniable aspect behind most of what Warren Buffett and other value investors like him like to look for in an investment: a clear-cut discount. Now that shares of Taiwan Semiconductor stock have traded down to 73% of their 52-week high level, that reality might start to set in across the board despite current trade tariff fears.

At this low price, bearish traders seem to have attacked the possibility that President Trump’s tariffs will bring about the worst-case scenario for Taiwan Semiconductor and other industry stocks, though reality seems a bit different today.

Now that chip exports from China have been exempted, some of these fears have been rendered irrelevant, opening up a path for the stock to trend higher and retest previous highs, if not make new ones. Of course, price action is not something Buffett is concerned with, so here are some fundamental factors that do matter.

Financial Profile: The Makeup for Compounding

If there’s anything that differentiates a business from the rest of the pack, it's the level of profitability it generates, and it all starts with the rate of gross margins. Since a high gross profit margin typically indicates buying power and a higher-than-average market share, Buffett and other investors tend to look for this.

Taiwan Semiconductor’s financials show that up to 57.4% in gross margins were generated over the past 12 months, giving the “green light” to the belief that this company holds some pricing power and significant market share. Now, these benefits have started trickling down into something much more critical, something investors hunt for all the time.

A high retention rate from each sale allows management to allocate capital more effectively, essentially accelerating the rate at which value compounds within the business, and this is something that can be quantified through the return on invested capital (ROIC) rate.

Taiwan Semiconductor reported up to 22.3% in ROIC for the past year, an extremely attractive level considering that annual stock price performance tends to match the long-term average ROIC rate of any business, so investors should look at this former Buffett pick as one that is still worth having today.

The Market’s Take on Taiwan Semiconductor Stock

It’s one thing to see these figures and become bullish as an individual. Still, individualism very rarely turns into profits in this business, as the broader market has to become aware of the same view and then move the stock in that direction. This is why checking in with other participants, starting with Wall Street analysts, is essential.

When it comes to these analysts, investors can see that the consensus price target is still set at $212 per share despite all the negative headlines surrounding semiconductor stocks, meaning an implied upside of as much as 28.3% is still present in this stock’s future to be taken advantage of by willing investors.

Speaking of taking advantage, some investors have already started doing just that recently, as can be seen by the 11.7% boost in holdings coming from institutional allocators at the Mather Group. This move raised their entire position to a high of $1.1 million today, but more importantly, it signaled confidence despite the storm markets find themselves in.