Over The Pond – Trump “All in” on Chips?
Written by Julian Wheeler – Partner and US Equity Specialist
On Thursday, August 14th, about 20 minutes before the market close, the news broke that Trump’s administration might take an ownership stake in Intel. This was a surprise to most of us, but probably not to the person who had just paid a few pennies for 1500 Call Options on Intel a few moments earlier, that had only one day left before expiring worthless. The shares started trading over 9% higher on the open next morning. ‘Tidy’, as a certain Welsh lady might say.
But what does it mean for the company, the sector and in fact the entire global economy, given that Semiconductors are the most important thing on earth these days?
I have written on several occasions, as have many others, about the absurdity of the present arrangement, whereby the world continues to allow around 70% of all semiconductors to be made on a 100-mile-long island off the coast of China. Formosa may be the historical name of Taiwan, but the current status quo is anything but beautiful. Should China take any action that led to an interruption of the supply of Chips from TSMC, it would cause a far greater collapse in the global economy than if Saudi Arabia stopped pumping oil. The risk to the company’s fortunes from this calamitous event was deemed too great to bear by Warren Buffett forcing him to sell Berkshire’s holding a couple of years ago. Just like property, it was all about location.
But why did TSMC become such a dominant supplier? Because Intel fell behind in the race and the costs of manufacturing became so astronomical that only Government subsidised Samsung (and TSMC themselves) could continue to spend on the required capital equipment. But now, given its strategic importance and the overall MAGA policy direction, I can quite see why the Trump Administration would feel the need to do the same as part of their reshoring efforts. However, this is not a ‘bailout’; Intel isn’t bankrupt in the way the insolvent Banks were in 2008. The company could trundle on with its existing, profitable but dwindling business. It just cannot afford the enormous capital expense to compete at the leading edge with TSMC, without some form of certainty that customers will make purchase orders to justify that investment.
Enter Trump as the man to arrange that! Having completed his role as ‘Head of Sales’ for Boeing (every country trade deal announced so far, apart from the one with the EU, has included an aircraft order) he will now employ the same strongarm tactics on Intel’s behalf, especially if he is a part owner. You can bet that those recent multibillion investments in the US announced by the likes of Apple and Nvidia are heading into the Intel coffers.
Does this make Intel stock a buy? Possibly one for the brave, because there are many unknowns. We have no idea what sort of bargain (or pound of flesh) Trump will extract for putting up taxpayer money. And are you buying the same Intel as previously, or a ‘new Intel’ separated into two components: a Chip designer and a Foundry set apart. But while we wait to discover the terms, it will surely trade higher in the short term. Few Active Managers have significant holdings in the stock so the risk of not owning ANY of it increases as it rises. Sell a little Nvidia for example, or other such Tech holdings to make room for some Intel?
And á propos of Nvidia and the rest of the Semiconductor sector, I’ll have a stab at predicting who gains and who loses if Intel becomes part nationalised.
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Nvidia: Neutral to slightly positive. Being so far ahead of Intel in GPUs they hardly compete anyway, therefore the outcome is less relevant to them. But Nvidia should benefit from having a credible alternative source of manufacturing to TSMC. Buying from Intel in the USA will be the trade off for being allowed to sell Semis to China.
AMD, Qualcomm and ARM. Wait and watch as a binary decision. If Intel effectively abandons chip design becoming a government backed foundry business, that is a win for all 3 of them. If they remain the same, a new well-funded Intel could regain momentum, particularly against its traditional competitor AMD.
LSCC: Lesser-known Lattice is in the same coin toss situation. If able to buy Intel-owned Altera, that would be outstanding, but if it is sold to a better home that would be a negative.
Semiconductor Equipment. A positive for the whole group, especially ASML, for whom Intel is really their ‘other’ customer apart from TSMC.
All good then? No, I think there is a loser.
TSMC: while it might not get much worse quickly, can it get any better from here? I mentioned the geopolitical risk earlier but also if the USA is determined to build Chips, suddenly the defence of Taiwan becomes less important. As a business, the cost differential due to yield efficiency that TSMC enjoys over Intel can easily be overcome in Trumpian Economics. Basically, to make up for the higher cost of a domestically produced Chip, you just add a whopping tariff on any import coming in from Taiwan.
While Apple won’t make entire iPhones in the USA – it will make the major component that powers them.
*Written before announcement of Softbank investment into Intel
For more background on our U.S. market views, visit the Over the Pond archive.
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