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Lithium Stocks are the Secret to EV Riches

Dec 7, 2022

Lithium Stocks are the Secret to EV Riches

TSMC, the world's largest contract chip manufacturer, started making semiconductor chips in 1987.

Warren Buffett's Berkshire Hathaway bought a stake in TSMC recently, in 2022.

Is this a case of recognising the potential of semiconductor manufacturing too late?

Or is this a case error of omission, as Buffett would call it?

What took a genius like Buffett over 30 years to convince himself about the long-term prospects of this technology supply chain?

If you ask me, it was neither oversight nor lack of conviction.

Rather, it's typical Buffett style value investing, seen in the case of smartphone maker Apple as well.

TSMC may have been manufacturing chips for three decades. But it took Covid-19 like pandemic to bring the global chip supply chain to a standstill.

Ever since, not only has the demand for the chips multiplied, but supply has been constrained too. Primarily because supplies from China, which has among the largest chip capacities, has dried up.

The US and European nations are also wary of importing China-made chips. Then comes the geopolitical risks. TSMC is headquartered in Taiwan. This is a territory China has long claimed as part of its own and threatened to occupy by force.

The US has responded to that threat by promising to defend Taiwan from Chinese forces.

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The US-China conflict has escalated after the Russia-Ukraine war. As a result, not just American but even European semiconductor chip designers are looking to de-risk production. They are looking for foundries outside Taiwan given TSMC's questionable future.

All put together, the investor sentiment is extremely negative about TSMC.

TSMC's ADRs, which Berkshire has invested in, are down 43% from a peak earlier this year.

This is similar to Buffett buying Apple in 2016, when the stock had slumped nearly 30% from its peak.

Buffett may have long held conviction to buy the stock of Apple at some point. But he waited till the coveted tech stock got temporarily unpopular with the market due to poor quarterly results.

Similarly, TSMC's inability to supply to clients from Taiwan may be temporary. And therefore the discounted valuations of the stock may be a one-off.

The company already has plans to expand its existing facilities in Japan. It will construct more plants in the US and Singapore. It is also entering into JV with Indian chipmakers to get access to chip foundries.

Therefore, Berkshire's semiconductor buy may have been fantastic value investing.

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Now, how is this related to lithium stocks and electric vehicles (EVs)?

Well, lithium battery is to the EV ecosystem what semiconductor chips are to electronics ecosystem.

Both are parts of the final product and not the product itself. Both are super critical to the final product. And their shortage can bring respective ecosystems to a standstill.

In other words, just like the semiconductor chips, lithium batteries are a must have. India's electric vehicle manufacturing can be handicapped without lithium batteries.

To ramp up domestic battery manufacturing capacity and reduce the dependence on imports, the government has initiated talks with a few lithium-rich countries. Countries like Argentina, Chile, and Bolivia, among others have been approached for the supplies.

India has an estimated requirement of about 80,000-140,000 tonnes of lithium in the next two to three years. This could even increase if EV production is ramped up.

Electric two-wheeler penetration is expected to account for a minimum of 60% by 2030.

For electric three-wheelers, four-wheelers, and heavy commercial vehicles, it is likely to be 40%, 10% and 5%, respectively, according to McKinsey & Company.

This lithium is nothing but white gold. Yet very few companies in India are ramping up product of lithium batteries.

One such company, has been on the radar of StockSelect subscribers for a while. It's a lithium battery research is specifically suited for the climatic conditions in India. And a massive capacity ramp up is underway.

It is important that you do not miss the value buying opportunity in such lithium stocks before the mainstream investors start chasing them.

Warm regards,

Tanushree Banerjee
Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)

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