The Intrinsic Value Podcast 对 $TSM 的判断变化

So if we start with TSMC, Taiwan Semiconductor, that's a company you pitched in May of last year, and it's been a double. Yeah. At first glance, it is a bummer. I got to say that that we didn't invest in. It's actually just an oversight on our part because I did recommend adding a position in TSMC at the end of the episode and technically you agreed but apparently we just forgot about it which might be because your agreement also came with a 4-minute monologue of the risks which might be again why we didn't end up following up on it.

And I thought about summarizing them all here, but how about we just give you a listen. So, this is Sean from about a year ago. >> I'm not going to bury the lead. upfront I'll say I think I can get around to doing that but then just for the sake of of just putting everything out there. I will maybe say some of my concerns and obviously we've we've talked a lot about the China stuff and to some extent people who know me might say it's somewhat intellectually inconsistent for me to endorse Taiwan in investment in Taiwan here because at various points said that I tried to avoid Chinese companies and not necessarily because I think that they're going to you know there's imminently going to be a war between the US and China but there just seems like there's a lower threshold there where you know you could have some kind of fallout in relations where I could imagine a scenario where the US and China aren't maybe at war but there's some sort of sanctions being levied where even if these Chinese companies are undervalued at least from an American's perspective you could still be penalized and there could be some sort of sanctions that make it difficult if not illegal for you to own you know maybe not not even all Chinese companies but specific tech companies for example like if you're investing and Alibaba and Tenset. And so that for me is really the concern of China is not that there say anything bad about these companies or to even bet that there's going to be a war between the US and China, but just to say that there could be a lower threshold where the US government as for me as an American makes it painful for me to invest in these companies. And with Taiwan, I look at it differently because I don't think the US is going to sanction investing in Taiwan. And so truly it would have to almost be the worst case scenario. So I see the riskreward as a little bit different and where I see the risk is actually being a little bit greater with Chinese companies where you have the risk of a war but also you have the lower threshold of just some sort of like targeted sanctions that could impact you as specifically an American investor.

What really kind of puzzles me with this investment or gives me pause is to think about the fact that for anyone who's read the innovator's dilemma by Clayton Christensen, I think the semiconductor industry is literally the example that they use of the fastest changing industry. And this is something Buffett has always talked about of when an industry is so fast changing, you know, even the widest moes can disappear on relatively short time frames. If you're investing in a company on a 50-year time horizon, then you know a fast changing industry that like this like semiconductors is literally the textbook example of perhaps the most dynamic industry in the world where you know competitive advantages can be the most short-lived. That really gives me some almost more anxiety than the geopolitical situation with TSMC.

>> The valuation back then was quite attractive. You had a business basically grown revenue north of 30% margins that looked like a software company and it was trading at just 20 times earnings.

>> From a business perspective without all the macro risks, it is a great business. And maybe we should actually give a brief pitch on what makes TSMC special in the semiconductor space.

And really nobody else, there's no competitors that come close to their level of efficiency and output. And I think you called what they have a Lola Palooa moat back then where competitive advantages stack on top of each other. And the process technology lead that they have caused them to basically be the first to every new node. And that experience with the tech and the process also leads to much higher yields which is an important thing in semiconductors. So basically a higher success rate when manufacturing chips. That's what that means. And because this implies that TSMC can actually deliver on the orders that come in, the entire tech industry favors ordering from them.

And just like announced in our pitch last year, TSMC is working on diversifying operations internationally. So TSMC has committed I think it's close to $300 billion for factories in the US, Japan and Germany with the vast majority of that money I think about 260 billion going to the US and towards factories that can actually generate or produce those new nodes.

But my point is, the fact that TSMC doubled says more about the markets right now and the state of AI than about the long-term outlook for that company. And I'm definitely not bearish on it. I think TSMC was one of the highest quality companies that I personally looked at and I very much regret not at least building a position in my personal portfolio.

That said, the doubts you had, I would say still are all valid. Not only on the political side, but you also brought up the semiconductor industry generally and how historically it has not been a great place to invest in. Although you could argue that TSMC sort of changed the game.

And they had other architecture and especially TSMC's foundry model disrupted. And for everybody who doesn't know what the foundry model is, I don't want to go into the details here. Again, we link to all the company's pitches that we discussed today in the show notes, but it doesn't look like TSMC is making the same mistake anytime soon. It still produces the lower-end nodes. And as I mentioned in my pitch back then, those old fully depreciated FABs are even more profitable relative to the revenue share than the bleeding edge. So, there's no undefended low ground which a disruptor could use for an entry here.

And as long as the fundamentals are driven by chips manufactured for the AI industry, I would say the risk of getting disrupted via the lower end does seem less likely. There's no good enough when it comes to customers like Apple or Nvidia who are desperate for top-end performance and are going to pay almost anything for the frontier. And so Jensen Hang publicly said he'll pay whatever TSMC charges.

With investments like TSMC, it's a bit different because we literally said, let's make it a position. So I would probably argue that we made the mistake of looking at it a bit too binary as in there are terminal risks but if we make it a 2% position we would survive the worst case if it should actually come to that and we would still capture enough upside if it ends up being you know a 3x and let's say 2 or 3 years and beyond that I mean a worst case between China and Taiwan would not only hurt TSMC or Chinese equities but basically all US big tech would take a massive hit as well as all other companies.

Perhaps stocks like TSMC grow into the valuation over time and they won't see a major downturn in the meantime, but I wouldn't want to bet on that today.