For the first time in a long time, the United States is seriously considering increasing domestic manufacturing of semiconductors (“chips”). For years, the United States has been extremely dependent on Taiwan for chip production; However, the threat that China will seek to reunify the island, potentially by force, makes this a huge economic risk.
For this reason, the United States introduced the CHIPS and Science Act, which provides monetary incentives to companies that increase their manufacturing capacity domestically.
The Semiconductor Industry Association (SIA) recently released a report predicting that domestic production capacity will triple by 2032. This is a gigantic boon, considering that U.S. capacity has only increased by 11% between 2012 and 2022. The SIA reports 83 new projects, or $447 billion. in investments in 25 states and more than 50,000 jobs created since the introduction of the CHIPS Act in 2020.
Perhaps the most interesting development is the expected increase in domestic production of advanced logic chips used in artificial intelligence (AI). In 2022, the United States held 0% of global capacity. U.S. capacity for advanced logic chips will increase by up to 28% by 2032, according to SIA projections.
Here are some companies that will benefit from the coming explosion of the domestic manufacturing sector.
Intel
According to the SIA, Intel (NASDAQ:INTC) received the largest grant of any company so far, $8.5 billion. It also received $11 billion in loans for projects in Oregon, Arizona, New Mexico and Ohio. Total investment in these projects, which include new manufacturing plants, expansions and upgrades, is expected to be $100 billion. These projects are expected to provide significant long-term benefits to Intel due to increased capacity and efficiency.
Intel lost its former glory after missing out on the smartphone revolution (the vast majority use Arm holds-chips designed instead of Intel’s) and lagging behind competitors like Semiconductor manufacturing in Taiwan (NYSE:TSM). The proof is in the pudding, or, in this case, the stock market performance:
Investing billions in modernization and increased capacity is essential as Intel catches up in the industry. The question is whether it can do so effectively to capture the wave of AI sweeping the market. Advanced logic chips are essential to AI, and Intel is the only U.S. company designing and manufacturing them. Grants and loans will provide a significant boost and cover part of the costs of expansion.
Intel reported improved first-quarter financial results, with sales up 9% to $12.7 billion and a smaller operating loss. However, the company does not have positive free cash flow and is saddled with $48 billion in long-term debt. The stock trades with a forward price-to-earnings (P/E) ratio of 28, which is higher than TSMC’s P/E ratio of 25. Intel nevertheless has ambitious plans and significant government support as it seeks to expand its domestic capacity. The market opportunity is huge and will therefore ultimately depend on execution by Intel.
Taiwan Semiconductor
As you can see below, TSMC dominates the global foundry market share with over 60%, but it’s not resting on its laurels. The company is building three new manufacturing plants in Arizona, a $65 billion project funded in part by the CHIPS Act, with $6.6 billion in grants and $5 billion in loans. This diversification into the US manufacturing sector is essential due to Taiwan’s geopolitical realities with China.
TSMC’s first-quarter revenue increased 13% year over year to $19 billion when measured in U.S. dollars. The company has a formidable business model with a 42% operating margin, $14 billion in cash generated from operations, and total assets that exceed total liabilities by almost three to one.
Taiwan Semi stock trades at a P/E of 30 (25 forward), compared to its five-year average P/E of 23. The market is pricing in benefits from expansion and a new round of related spending to AI. . Nonetheless, this stock makes for an excellent long-term investment in semiconductors, so investors should watch closely to capitalize on any short-term declines.
Vertiv Holdings
In addition to the direct beneficiaries of government assistance, many adjacent businesses will benefit. AI applications need data centers to process huge amounts of information, and data centers need high-performance chips produced by Intel and TSM. As more and more data centers come online, the companies that manufacture the infrastructure will experience enormous demand.
You may not have heard of Vertiv Holdings (NYSE:VRT)but the stock has significantly outperformed Nvidia over the past year, as shown below.
Vertiv provides data centers with critical power, cooling, racking, cabling, other infrastructure equipment, as well as monitoring and management software. Its Vertiv 360AI product covers all these challenges in one comprehensive solution.
The first quarter saw Vertiv’s revenue growth of 8% year-over-year, reaching $1.6 billion. But that wasn’t the whole story. The company reported a 60% increase in orders, bringing its backlog to $6.3 billion. This is a huge number for Vertiv, which had total revenue of $6.9 billion in 2023 and expects to earn up to $7.7 billion this year.
Vertiv’s market cap of $37 billion isn’t outrageous despite the stock’s impressive run, given that the company expects operating profit of $1.2 billion this year, or $1.35 billion dollars over one year. non-GAAP (adjusted) – and free cash flow in excess of $800 million. The company is also buying back its shares. He used $600 million to take more than 9 million shares off the market in the first quarter.
Two of Vertiv’s partners are industry giants Nvidia and Intel, so this data center infrastructure provider appears to be a long-term winner when it comes to AI.
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Bradley Guichard holds positions in Arm Holdings. The Motley Fool posts and recommends Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
US Chip Manufacturing Could Triple in Less than a Decade: 3 Artificial Intelligence (AI) Stocks Set to Benefit was originally published by The Motley Fool
