The CHIPS Act just passed in the US Senate, which was a big hurdle to the US semiconductor industry and the global chip shortage as a whole. Let's talk about why this is important? Who benefits? And, of course, which stocks to buy.
What is the CHIPS Act?
The CHIPS Act provides $52 billion in subsidies for U.S. chipmakers to build factories to manufacture chips. The key word here, is manufacture. The only U.S. chipmakers that produce their own chips include Intel, Texas Instruments and Micron. The point of this legislation is to keep U.S. semiconductor production competitive with production in China, Taiwan and elsewhere in the world.
Why is it important?
This is really important, for obvious reasons... but I'll state them anyway. Increased national security, and decreased reliance on foreign countries. Because EVERYTHING (almost literally) requires semiconductor chips these days, it can be very bad if we experience a shortage... kind of like we are right now.
As we're seeing lately, modern warfare has less to do with weapons, and more to do with resources – whether it be natural resources like oil, or financial resources like the US Dollar.
If China, God forbid, invades Taiwan, then this scenario becomes real.
So, I believe the CHIPS Act is important to the U.S.
Who does it benefit?
The CHIPS Act, as I mentioned benefits INTC, TXN, and MU – the only companies who actually build in the U.S. Intel, is arguably the biggest beneficiary here since they're broke ground on two Arizona factories last year, and looking to build another $20m factory in Ohio. Intel is the investing heavily, and America's only player to give Taiwan Semi (TSMC) a run for its money.
If you don't know about TSMC, then check my previous post on Semis.
Domestic chip designers, like Nvidia and AMD, support the FABS Act – which has been presented to the House. I think it's fair to assume how Nancy will vote on that.
This seems like the obvious question to answer... which again, visit my previous post on this for broader context. I'm just going to re-look at Intel against the likes of AMD and Nvidia.
- Server & Semi-Custom segment is on fire... grew 87% over 287% growth the prior year
- Taking market share from Intel's CPU and cloud business
- Data Center is an area that should continue to have strong tailwinds, despite an economic slowdown
- I personally see $110 fair value, and would accumulate share with enough margin of safety below that
- Data Center segment is on fire, which is consistent with AMD
- CAGR similar to AMD, but priced much more expensive
- Trading at a discount to FV, but still more margin of error with AMD. I would rather go with AMD, unless you are specifically looking for more exposure to the GPU segment
- Don't expect anything impressive here... the real question is how much do the new plants and fab business bring in over the longer term.
- Below are pictures of their historical revenues by segment, where you can see that Client Computing Group (CCG) is their main segment and driv en by consumer demand, which is cyclical and also facing headwinds from rampdown of Apple CPU.
- Data Center and AI Group (DCAI) the second largest segment is growing, but no where near the pace of Data Center growth at Nvidia and AMD. They are losing market share to AMD.
- The rest of the segments are smaller drivers of revenue and profits, but the most important and interesting is the Foundry business (IFS) where all the CapEx is going.
- Based on Intel's forecasts, they are expecting the following
Not much has changed since I last looked at the semi names. Valuations have come down a lot, so my personal favorite remains AMD. Though I would look to add at $70 price range if we get it again, and I think Intel is a great bet on the potential future growth from domestic foundry business here in the U.S. Obviously the CHIPS Act is a great start in that direction. But, keep in mind this is a long-term bet that may or not pay off. The downside is limited imo, but I would prefer to keep in growth names like AMD to hedge that risk anyway. That's my take... what are your thoughts?
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