The CHIPS Act is set to revitalize the domestic semiconductor manufacturing industry.
The semiconductor industry has been having an up-and-down 2022. After record demand across the board in 2021, there have been significant signs of a deceleration in the industry. The frenetic pace of spending in both consumer electronics and computing infrastructure has diminished as the stay- and work-at-home trends have lost strength. However, the industry may now be surging out of its prior lethargy. That’s because, in July, Congress passed the $280 billion CHIPS and Science Act, which will include $52 billion in subsidies for domestic fabrication plants. This is one of the biggest programs launched by the U.S. government to benefit a domestic industry in decades, and it could fundamentally shift the competitive balance between Asian and North American semiconductor operations. These seven semiconductor stocks look particularly attractive given the changing tides.
Intel Corp. (ticker: INTC)
Intel has been having a rough year from an operations standpoint. Demand has dropped significantly and pricing hasn’t kept up with costs as the industry has slowed following the pandemic-induced boom. The company’s recent quarterly earnings results were particularly foul, and shares unsurprisingly slid to 52-week lows. However, traders may be losing sight of the bigger picture. Analysts have pointed out that the CHIPS Act seems to have been practically designed to help ensure that Intel would build and expand its new manufacturing facility near Columbus, Ohio. While Intel has had its struggles keeping up with more nimble rivals in recent years, there’s nothing like billions of dollars of government subsidies for next-generation plants to get a company back on track. Furthermore, even after its recent earnings report, Intel is still selling for less than 14 times forward earnings while offering a dividend yield of 4.1%.
Texas Instruments Inc. (TXN)
Texas Instruments is another clear beneficiary of the CHIPS Act. Not too long ago, the company announced plans to invest far more into new capital expenditures rather than increased dividends or share buybacks. Frustrated investors sold off the stock. However, this decision to bet on further manufacturing in Sherman, Texas, appears to be a winner given the new political landscape. Texas Instruments will be investing up to $30 billion to build four four fabrication plants, or fabs that can produce state-of-the-art analog and embedded processing chips. Texas Instruments states that these fabs will be able to meet the needs of customers for decades to come while reducing overseas supply chain risk for vital American electronics companies. And while Texas Instruments won’t be giving investors the larger share buybacks or dividend increases they received in the past, the stock is still attractive at less than 20 times forward earnings and with a 2.5% dividend yield.
Micron Technology Inc. (MU)
Semiconductor storage and memory chip leader Micron has seen shares slump about 34% in 2022 through Aug. 8. Shares are now trading at around 8 times analyst estimates for 2022 earnings and an astonishingly low 3.7 times enterprise value to earnings before interest, taxes, depreciation and amortization, a metric known as EV/EBITDA. Even more cyclical tech hardware companies tend to trade at a double-digit price-earnings ratio and something closer to 7 or 8 times EV/EBITDA. Why are traders practically giving away shares of Micron at present? Historically, data storage has been a boom/bust industry and folks fear another bust. That’s not unwarranted. However, Micron should have more pricing power going forward as the memory chip industry has dramatically consolidated in recent years. On top of that, Micron has domestic American manufacturing facilities and may benefit from the CHIPS Act as well.
Taiwan Semiconductor Manufacturing Co. Ltd. (TSM)
Taiwan Semiconductor, or TSM, is the second-largest semiconductor company in the world by market capitalization. TSM is not the most glamorous semiconductor business, since it primarily does contract manufacturing. However, being the leading semiconductor foundry has been an exceptionally profitable business and it maintains more than 50% market share in key markets. The company has been in the headlines recently due to concerns around Taiwan’s geopolitical situation. However, the company is spending tens of billions of dollars on new semiconductor manufacturing capacity in Arizona to hedge its risks. As a result, it should benefit from the CHIPS Act. Despite favorable industry dynamics right now, TSM stock has fallen about 26% year to date through Aug. 8. With that decline, Taiwan Semiconductor shares trade for about 14 times forward earnings.
GlobalFoundries Inc. (GFS)
GlobalFoundries is another semiconductor company right at the heart of the CHIPS Act discussion. The company is currently planning to build both a new factory in France and one in the state of New York. CEO Tom Caulfield warned earlier this year that the company’s plans to build another New York-based factory could be greatly delayed if the funding bill didn’t come through. However, with that now passed, it seems that the company should be able to go ahead with its expansion efforts. In recent years, GlobalFoundries has often run a distant third place in global foundry market share, and it has struggled to keep up with Taiwan Semiconductor in particular. High debt levels and uneven cash flow have limited GlobalFoundries’ efforts. However, the government’s aid may give the company a significant leg up and help it get back on a more level playing field with its key rivals.
Samsung Electronics Co. Ltd. (SSNLF)
Texas Instruments isn’t the only company putting up new fabs in Texas. Samsung is also participating in the trend with a new $17 billion and more than 5 million-square-meter location near Austin. This will join Samsung’s existing fab, which is also located in the Austin metropolitan area. Samsung is primarily known for its consumer electronics products such as smartphones and televisions. However, it’s a surprisingly sophisticated chip manufacturer as well, making semis for mobile, 5G, and artificial intelligence, among other applications. Samsung makes chips for sophisticated customers such as Nvidia Corp. (NVDA) and International Business Machines Corp. (IBM). Samsung’s new plant in the United States should help it win more clients with national security concerns, such as for projects where the end customer is the U.S. government or military.
Camtek Ltd. (CAMT)
With all these semiconductor giants building new manufacturing capabilities, this creates opportunities for industry suppliers. Camtek is one such example. It supplies inspection and metrology devices and services to semiconductor manufacturing companies. As all the new semiconductor capacity comes online, there should be an increase in demand for testing and inspection services. The money will flow down from the CHIPS Act through the big industry players on down to the smaller niche operators like Camtek. Analysts have feared that a slowdown in semiconductor demand would trip the industry up, but the new capital expenditures should offset that for Camtek in particular. Camtek has tripled earnings since 2018, and analysts see further growth ahead. Meanwhile, the stock has dropped about 33% year to date through Aug. 8, leaving shares at 20 times earnings.
7 best semiconductor stocks to buy for 2022:
— Intel Corp. (INTC)
— Texas Instruments Inc. (TXN)
— Micron Technology Inc. (MU)
— Taiwan Semiconductor Manufacturing Co. Ltd. (TSM)
— GlobalFoundries Inc. (GFS)
— Samsung Electronics Co Ltd (SSNLF)
— Camtek Ltd. (CAMT)
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Update 08/09/22: This story was published at an earlier date and has been updated with new information.