Cashing in On U.S. Chips
Posted May 06, 2022
They call us techno-sapiens.
Some futurists are claiming we’re already a different species: technology has changed our brains and minds forever.
I don’t know. Sounds a little dramatic.
But one thing’s for sure: technology isn’t going anywhere. It will continue its move into our lives, often in surprising ways.
And the speed at which it does so will be difficult to keep up with.
Colleague Ari Goldschmidt, contributor of Altucher’s Investment Network pointed out recently:
“It wasn't long ago that buying an internet-connected lightbulb cost as much as $30-$50 per bulb. Compare this to current prices - even with inflation and supply chain issues - these next-generation bulbs can be purchased at Costco for just $5.”
Now, he says, “you can't even buy a refrigerator or blender without a semiconductor in it.”
It’s a trend that’s not likely to let up.
“In fact,” says Ari, “if anything we'll probably see it pick up further in the next few years… bringing greater capabilities to devices that already have sensors and perhaps introducing semiconductors to a whole new class of gadgets that don't.”
Meanwhile, of course, we’re in the midst of a chip shortage.
Yet another example where a crisis is creating an opportunity:
A lesser known bill — the CHIPS Act — could be a massive boon for the American chip industry. And, as a result, one company is set to rake in the lion’s share of the market.
Ari has the full scoop below.
Cashing in On U.S. Chips
No matter which way you look at it, demand for semiconductors isn’t going down.
So when I see semiconductor stocks selling off because of recession/inflation/Russia/covid concerns, I see easy money to make.
Now, historically, semiconductors have been treated as cyclical. This is because many of the goods that require semiconductors are durable products that folks might hold off on replacing in a recession.
However, if you think about how indispensable mobile devices have become - and how short their useful life is - it seems unreasonable to believe that consumers would hold off on upgrading for very long.
The other reason that semiconductors are cyclical is because of how long it takes to expand capacity.
The process of making semiconductors requires highly specialized equipment and factories that are extremely expensive and time-consuming to build.
Because of this, it's simply not possible to quickly expand manufacturing capacity when demand increases.
We've seen this over the past two years especially.
New and used car prices have skyrocketed because of supply chain issues limiting manufacturing capabilities.
Same for the latest generation of gaming consoles like Xbox and Playstation. At one point, even certain models of TVs and laptop computers were in short supply as semiconductors were hard to come by.
Globalization has made supply chain issues with semiconductor and electronics manufacturing even more complicated.
For the better part of the last 20 years, semiconductor manufacturing has largely taken place in Asia.
This introduces a number of challenges.
For one, as soon as someone in China sneezes, the whole country quarantines, shutting down electronics manufacturing in Shenzhen, and creating a ripple effect on the global electronics supply chain.
Since the pandemic (and even a few years prior), it has become abundantly clear that the west is too dependent on Chinese electronics (and semiconductor) manufacturing.
Taiwan is the world leader in semiconductor manufacturing. The tiny island nation punches above its weight and produces more than 1 in 5 semiconductors globally. Currently, nearly all of the world’s most advanced semiconductor (<10 nM) manufacturing capacity is located in Taiwan.
However, Taiwan has serious baggage.
Although Taiwan claims independence from mainland China, the Chinese government does not recognize Taiwan’s independence.
This creates serious political and geographic risk for semiconductor manufacturing.
If, for instance, China decides to invade Taiwan or establish a naval blockade, semiconductor supply chains would be massively disrupted.
Roughly 72% of semiconductors are produced in either China, Taiwan, South Korea, or Japan. This means that any sort of regional issues (like war, natural disaster, etc.) could likewise cripple the semiconductor supply chain.
Finally, there is the concern about China’s growing interest in semiconductor manufacturing.
It is estimated that China will add about 40% of new semiconductor manufacturing capacity in the next decade.
This introduces security and policy risks.
In 2015, Amazon discovered that the world’s biggest supplier of motherboards, Super Micro Computer Inc., had been infiltrated by Chinese military intelligence.
At factories in China, the Chinese government was covertly installing microchips onto Super Micro’s hardware. That hardware allowed the Chinese military to remotely monitor and control servers using Super Micro products.
The affected products were found in servers at major U.S. companies like Amazon, Apple, large U.S. banks, and U.S. government defense contractors.
For all of the above reasons, politicians in the U.S. have been banging on the desk for the U.S. to invest more heavily in semiconductor manufacturing.
Although semiconductors produced in the U.S. have historically been more expensive, this is in part because countries like China and South Korea provide generous subsidies to the industry.
The CHIPs Act
To counter this, Congress is in the process of negotiating a bill that would provide $52 billion in subsidies for domestic semiconductor manufacturing.
In addition to investing in research and development of new semiconductors, the bill would invest billions in the expansion and modernization of existing semiconductor manufacturing in the United States.
Although negotiations are still ongoing, it seems that any day now we’ll see the passage of this massive subsidy package.
One company in particular is uniquely positioned to take advantage of the Chips Act.
The company’s strong smartphone sales and their existing long-term agreements suggest GFS should be able to withstand a recession reasonably well. Given the recent drop in share price, it looks like an excellent short/medium-term play to capitalize on sustained semiconductor demand and the Chips Act.
I’d take advantage of the opportunity to buy this unique company at an affordable price before the market catches on.
Out of respect for Altucher Investment Network subscribers, I can’t share it here.
If you’re not yet a member, this play alone could cover the costs.
See you inside,