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Introduction
Have you ever watched a sports game where the referee was acting in favor of one team over the other? Oftentimes, the team receiving favorable calls from the referee wins. If Team A receives favorable calls while Team B gets penalized for the slightest violations, Team B will be shifting valuable portions of their attention and abilities to avoid those violations. On the other hand, Team A will be able to solely focus on their abilities to score massively increasing their chance of winning the game. In the sports world, this act of violation will likely be barred from happening. However, if this act of violations were to continue throughout the season, Team A will most likely be the best performing team in the league.
The above scenario is unfolding today in the semiconductor fabrication industry. A semiconductor is viewed as the key to economic boom and national security by most countries around the world leading to global superpowers racing to secure this vital technology. Therefore, the western world is becoming a biased referee for Intel (NASDAQ:INTC) to not only make Intel win in the game but to be the top performing team during the entire season. Intel’s competitors are fighting an uphill battle as western countries start to see the matter of semiconductor fabrication reshoring as the matter of national security. Thus, Intel is a buy.
Europe and the United States Have a Problem
Semiconductor fabrication leadership in the modern world is in Taiwan with TSMC (TSM) and South Korea with Samsung (OTCPK:SSNLF). Although both countries are allies of the west, their respective geographic positions create risks. China continues to claim that Taiwan is not an independent nation but part of their state threatening the sovereignty of the nation and the security of the vital technology. Further, South Korea is in proximity to China as well as North Korea leaving the country to be heavily reliant on China for its economy. South Korea’s close geographical region to China also creates risks if an armed conflict arises in the future. Therefore, if any conflict arises between China and the United States, Europe’s semiconductor supply chain will be significantly challenged.
Solution
Both Europe and the United States have said that semiconductor re-shoring is the solution to this national security problem. By bringing semiconductor manufacturers to produce within their borders, the security of the critical supplies can be guaranteed. Thus, the United States and Europe have announced the CHIPS Act to financially support domestic semiconductor manufacturers. The EU has announced a 45 billion euro package to support research, supply chain, and manufacturing while the U.S. is in the process of passing a $52 billion Chips Act to also support research, supply chain, and manufacturing. While this bill may be trimmed down, the government’s willingness to support a handful of companies in the name of national security still stands.
Intel
Today, competitors like TSMC and Samsung are leaders in the industry with Intel trying to catch up, and both of these companies have announced that they will build a $12 billion and $17 billion dollar fabrication plant in the U.S., respectively. Then, why or how will Intel be the biggest beneficiary if all its major competitors are building fabrication plants in the U.S.?
Intel is the only advanced semiconductor manufacturer based in the U.S. or the western world, and Intel is the only manufacturer building the most technologically advanced plant that it can offer in the U.S. and Europe. Samsung is building a 5nm plant just outside of Austin Texas with the goal of it being operational by the second half of 2024. However, the technology will not be its most advanced version in 2024, Samsung has started its production of 3nm chips in South Korea leaving the U.S.’s fabrication plant at 5nm. Further, TSMC is also building a 5nm plant in the U.S. with a goal of it being operational by the end of 2024, but the company is expected to start mass producing its 3nm chips in Taiwan by the end of 2022. Both Samsung and TSMC are also tied to their respective country’s national security. As such, the U.S. failed to make these companies manufacture the most advanced chips in the U.S. leaving them with Intel as their only option to bring the most advanced semiconductor manufacturing on-shore. For Europe, because TSMC and Samsung do not have any plans to build a plant in Europe, they also have to solely rely on Intel for its national security. Therefore, in the current situation, western semiconductor national security solely depends on Intel’s success. Therefore, Europe and the U.S. will do everything they can to support Intel to win the race instead of enticing Samsung and TSMC to build more fabs in their respective region.
CHIPS Act
How do Europe and the United States’ Chips Act specifically benefit Intel?
Starting with Europe, Intel received 6.8 billion euros or about 7.3 billion dollars to build a fabrication plant in Germany, which equates to about 40% of the cost to build the fabrication plant. Further, Intel will invest 17 billion euros in Ireland and 4.5 billion euros each in France, Italy, Poland, and Spain. 40% of all of these projects are funded by the E.U.
In the U.S., Intel will benefit from both the FABS Act and CHIPS Act. FABS act will provide Intel “25% tax credit towards the purchase, construction, manufacture, or utilization of a semiconductor manufacturing facility.” This will likely aid Intel by $5 to $10 billion. Then, through the CHIPS Act directly subsidizing the manufacturing facility, Intel is expected to receive about $20 billion from the government.
As such, in both Europe and the U.S., Intel will be receiving significant benefits. As seen by these massive stimuli to Intel, I think it is reasonable to argue that Intel’s success directly correlates to both Europe and the U.S.’s national security. Therefore, the continued government support, which will likely increase if Intel requires more, will bring Intel to the front of the competition in the coming years.
Valuation
Now, in my opinion, is the time to buy into Intel as the company is putting all its effort into accomplishing its long-term turnaround efforts leading to a valuation depreciation. Intel currently has a market capitalization of about $166 billion with a forward price-to-earnings ratio of about 12. In comparison, TSM has a forward price-to-earnings ratio of about 14, even after their valuation multiples crunched after the fear of China’s invasion of Taiwan resulting from the Russian invasion of Ukraine. Further, other semiconductor fab-less players such as AMD (AMD) and NVIDIA (NVDA) have a forward price-to-earnings ratio of 21 and 34, respectively. Since Intel has both chip designing and manufacturing processes in-house, I believe upon the company’s successful turnaround effort, Intel may be able to receive a valuation multiple between 14 and 21. Therefore, considering Intel’s fairly low valuation and strong growth prospects ahead, Intel is a buy.
Summary
When governments are rooting for you and your success, winning the game becomes much easier. Intel is receiving heavy support from both the E.U. and the U.S. through their own CHIPS Act. Intel will be receiving tens of billions of dollars. Therefore, I believe Intel’s chance of winning this game is starting to work in the company’s favor making them an attractive stock, especially during times when the company’s valuation is extremely low.
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