Berkshire Hathaway's recently announced stake in Taiwan Semiconductor (NYSE:TSM), along with Qualcomm's (NASDAQ:QCOM) order cut at China's Semiconductor Manufacturing International Corporation, have both been largely seen as "positives" for the semiconductor industry.
However, according to Fubon Research the chip sector is not out of the woods yet.
Analyst Sherman Shang noted that the cycle is likely to bottom out either this quarter or next as days of inventory start to decline, but Shang remains uncertain about whether the recovery will look like the boom the industry just went through.
"The overall semi recovery entering another cycle will depend on the recovery of end demand, which has not been seen based on our checks," Shang wrote in a note to clients.
Nonetheless, valuations are now attractive, with Shang pointing to the fact that Taiwan Semiconductor's (TSM) valuation has been "deeply de-rated" over the past six months due to geopolitical risks, and the expectation is that "a re-rating will likely happen in the short term."
Earlier this week, Berkshire Hathaway (NYSE:BRK.B) (NYSE:BRK.A), led by legendary investor, Warren Buffett, announced a 60M share stake in Taiwan Semiconductor (TSM). Buffett's effective endorsement of Taiwan Semi (TSM) led to a sharp rally in the stock, and the chip sector as a whole.
Shang added that the sizable stake, worth some $4.1B, is likely an indicator of "decreasing" geopolitical risk in the region, especially in the wake of the recent meeting between President Joe Biden and Chinese Premier Xi Jinping in which both men expressed a desire to have more frequent communication.
"In terms of the geopolitical risk, Biden’s conference last week after the mid-term results clearly indicated that he wishes no incremental conflicts with China but there will be rising competition," Shang wrote. "Therefore, we believe the overall geopolitical risk will start to lessen and lead to a re-rating for Taiwan’s semiconductor supply chain."
Biden also said at the three-hour long meeting that the U.S.'s One China policy had not changed, and the U.S. was not looking for conflict with the world's most-populous country.
In addition to the big news from Buffett and Taiwan Semiconductor (TSM), Shang pointed out that Qualcomm's (QCOM) cut at SMIC may wind up causing other chip companies to follow, with orders at the China-based foundry for "internal demand only."
"We think this industry development will create an environment with less pricing competition," Shang added.