Shares of foundry giant Taiwan Semiconductor Manufacturing (TSM -2.36%) were falling today, down as much as 3.3%, before recovering to a 2.1% decline as of 1:52 p.m. ET.
Taiwan Semi surged last week on the news Warren Buffett’s Berkshire Hathaway had taken a sizable stake in the semiconductor foundry giant. So it’s not that surprising to see some investors locking in short-term gains on Monday.
This is especially true as the Federal Reserve has reiterated its hawkish commentary even in the face of falling inflation, as well as broader lockdowns in China amid the first reported COVID deaths in the country in six months. Moreover, TSMC announced it would build its most leading-edge manufacturing capabilities in the U.S., which will be an expensive endeavor.
Early Monday, Beijing reported its first COVID-related deaths in more than six months. While the victims were between 87 and 91 years of age, the deaths came on the back of a recent surge in cases amid colder weather. The news sparked heightened COVID restrictions in the city and across the country.
China’s “zero-COVID” policy of lockdowns has been highly disruptive to the global economy this year, both from a supply and demand perspective. The supply snarls have driven up costs, while demand for goods and services has plunged in China this year. China is a big consumer of personal electronics, to which Taiwan Semi is a key supplier.
TSM also made news today, as it announced it would be building capacity for its most advanced 3-nm node chip production in Arizona. Previously, Taiwan Semi had announced it would be building out 5-nm capacity in Arizona.
The build-out in the U.S. is no doubt a good risk mitigator for the company, as tensions between China and Taiwan boiled over this summer, leading some to fear a potential Chinese invasion, which would disrupt TSM’s production of crucial semiconductors. Therefore, to have some capacity outside of Taiwan would ensure the company would continue to produce at least some advanced chips, should that scenario come to pass.
Still, the U.S. build-out will be expensive, even with incoming subsidies from the government following the passage of the CHIPS Act this past summer. TSMC founder Morris Chang said in a recent interview:
I not only believe, but know for a fact that the cost of manufacturing chips in the U.S. will be at least 55% higher than in Taiwan… But that does not mitigate against moving some capacity to the US. The chip manufacturing process we moved over is the most advanced of any company in the U.S., and that is very important to the U.S.
In addition to this potential high-cost build-out, some tech investors may be selling the sector’s recent rally on the back of hawkish commentary from Federal Reserve officials last week. The Nov. 10 inflation report sparked a rally, as inflation measures showed a broad slowing. However, Fed governors made several appearances last week, in which they maintained their hawkish commentary around the future path of the federal funds rate.
That led some to think the Fed will go too far and push the economy into recession as a result.
The higher costs of the U.S. build-out may be concerning to some; however, as TSM dominates leading-edge chip production, with about 90% market share, it should be able to raise prices accordingly.
That is why longer-term investors in TSM shouldn’t worry about the expensive build-out, or a potential recession next year. While TSM’s stock could decline in the short term in those scenarios, over time, semiconductor sales will grow, likely faster than overall GDP, thanks to increased digitization and other powerful long-term growth drivers.
Billy Duberstein has positions in Berkshire Hathaway (B shares) and Taiwan Semiconductor Manufacturing. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares) and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.