Intel Baby!

I still haven’t found any great investments that are 100% secure, but after learning about the various difficulties in the semiconductor industry, I have zeroed in on Intel. This is because of its geopolitically safe location and because of its unique position as both a chip designer and a chip manufacturer. The current events in Ukraine, China’s claim on Taiwan, and the global pandemic have made many predictions wildly impossible—and so I chose a company that is separate from these issues.

Before starting, let me clarify that Intel has the proper fundamentals of a large company. A good earnings track record, consistent dividend payments, low debt, a low p/e ratio etc. It is nothing spectacular but it has the DNA of a healthy company that will stick around for a while. What I am trying to say is that this ~$200 billion company is a conservative investment as far as tech companies go. Catastrophic portfolio loses from this investment is highly unlikely.

So, let’s keep this post short. I won’t be too exhaustive with numbers, and I will supply numbers only to grant some perspective.

Semiconductor chips that we use in all electronics, from phones to cars to refrigerators, are designed by companies such as Intel, Apple, AMD, and other commonly known companies. These blueprints are then sent to a manufacturing plant that produces them. The manufacturing process is separate from the design process because these companies realize that specializing can increase profit margins. The manufacturing of these chips is extremely capital intensive and requires new fabrication plants that cost upwards of $20 billion dollars every couple of years. This is about the same cost as an aircraft carrier, or about 20% of Apple’s yearly earnings (Apple is the 3rd highest earner behind Berkshire Hathaway and a Saudi Arabian company). In short, manufacturing and designing chips are their own separate things.

But here is the fun thing. China, South Korea, and Taiwan together produce 87% of all of these chips. Of the advanced chips (smaller than 7 nanometers), Taiwan produces 90% and Samsung gobbles up the remaining share. Every other country does not own the equipment or knowhow to produce these advanced chips (except the U.S. of A baby). And with the recent geopolitical upheaval spicing things up, I would not be able to sleep soundly if I put money companies where crazy things are happening. Taiwan produces a lot, China doesn’t recognize Taiwan, and even though I doubt anything will happen, I won’t be making any bets any time soon.

Remember how I said that South Korea (Samsung) and Taiwan (TSMC) produce all of the advanced chips? Well Russia and China are still 10 years away from even having this technology to produce their own advanced chips—but even more—they do not have a lithography machine to print anything smaller than 7 nanometers. There is only ONE company (ASML) that can sell a machine of this type. They essentially have a monopoly on high tech Lithography machines, and although ASML is a Dutch company, its machine is U.S. Patented. They produce about 50 of these a year, each one costs up to $150 million dollars and half of them go to TSMC each year. Cool. Intel gets some and Samsung gets some [I think UMC may get some too—another Taiwanese manufacturing company].

There are other companies that produce chips in the west such as Global Foundries and Intel. Yes, Intel designs AND manufactures their own chips—but Intel uses TSMC to manufacturer their advanced < 7 nanometer chips. Intel’s and Global Foundries’ manufacturing plants are all located in the western hemisphere extending to Israel for Intel and Singapore for Global Foundries. Global Foundries however announced this year that they cannot and will not compete with TSMC’s advanced chips and will instead focus on lower tech chips which are still in high demand (we are still in a semiconductor shortage). This leaves Intel as the sole Western chip Manufacturing company that has the capital and tech to be able to produce high-tech chip fabrication plants. Intel makes around $79 billion dollars of revenue each year with $29 billion in cashflow each year—they can afford to spend more than $20 billion on state of the art Fab every few years even if they don’t drive a profit from their chip manufacturing endeavors. They have 5$ billion dollars in cash and they can sell minor offshore manufacturing plants if they ever run a deficit.

Knowing this about western chip manufacturing companies is important because countries, seeing the recently unstable geopolitical affairs in Ukraine, China and Taiwan, and the ongoing pandemic have made steps to fund domestic chip research and manufacturing plants. Other countries are doing the same. On June 8, 2021 and February 4, 2022—the senate and house have passed bills granting around $100 billion to those companies that want to build chip fabrication plants in the U.S or research new developments in chip technology. Intel announced plans to produce fabs in Arizona and a Giga fab in Ohio by 2024 and 2025. This is some ways off, but it shows Intel’s movement that in some ways, no other company can replicate. Ah yes, that sweet moat. They intend to produce high tech chips in these fabrication plants as well.

So, what of TSMC and Samsung? These are giants and it will be hard for Intel to compete against them—This is the unknown. I still do not know enough about this industry to place 100% certainty in my choice of Intel, but I am reasonably confident enough. I will have to scour TSMC’s previous years’ financial statements to see the correlations between capital expenditures and increases in revenue. We do not know (1) if Intel can compete with these giants (they certainly have the revenue to do so), (2) we do not know if Intel will succeed in creating their fabrication plants in a budgeted or timely manner, and (3) we do not know what will happen with the world’s politics in the future. This last uncertainty is why I focused on Intel, however.

Cheers and until next time!

P.S. I am starting school, and am working on other projects—So I will be dialing back the frequencies of my posts to once a month.