I hate to do this. Taiwan Semiconductor Manufacturing (TSM) is the premier chip manufacturer in the world and I see the company continuing to grow revenue from the increasing demand for smaller and more powerful chips.
And I certainly hate to sell a stock that’s down 46% for the year to date as of the close on October 18.
Under ordinary circumstances, I would hold on and ride out the current slump in the semiconductor cycle. After all, we’ve been here before, right?
Except that the U.S.-China trade war and the possibility that China will look for a confrontation over Taiwan make the current circumstances anything but “ordinary.”
U.S. restrictions on the export of advanced technology semiconductors to China are a big deal in themselves. In the first nine months of 2022 10% of the company’s revenue was from direct sales to China headquartered companies. Customers such s Qualcomm (WCOM), Advanced Micro Devices (AMD), and Nvidia (NVDA) have significant revenue exposure to China that ranges from 20% to 60% of sales, Morningstar estimates. I see the loss of sales due to the restriction and the time and expense of reengineering products and processes to meet the terms of the restrictions cutting annual revenue growth by roughly 50%.
But I’d still be inclined to hold–that’s how much I like the long-term story at Taiwan Semiconductor.
Except that my read of the pressures on newly elected President Xi Jinping sees China moving to some sort of confrontation over Taiwan. In the best-case scenario, I think this confrontation results in just more military exercises, more Chines assertions of control over the waters around Taiwan, and more “saber-rattling (or whatever it should be called in an era of cruise missiles.) At worst, we’re looking at overtly military actions combat that involves ships and airplanes from China, Taiwan, and the United States. (For more on why I see the pressures on Xi pushing him toward confrontation see my YouTube video “China Retaliates,” which I will post later this afternoon.)
Can I predict what path this crisis will take? No way. I’m not sure that at this point even President Xi has a concrete plan.
But I do know that anything which ratchets up the military tensions over Taiwan between the United States and China will not be good for shares of Taiwan Semiconductor Manufacturing even though the company is working as fast as it can to expand manufacturing to the United States, Europe, and Japan.
This is the kind of “black swan” low-probability-but-huge-impact event that I want to observe from the sidelines. In cash. I will certainly re-buy when the coast is clearer.
I have a 33.08% gain in shares of Taiwan Semiconductor in my 50 Stocks Portfolio since I initiated that position on October 17, 2019. I have a 32% loss in my Millennial Portfolio on my JubakAm.com subscription site since I initiated that position on June 1, 2022.
