Warren Buffett made headlines when his company, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), recently revealed a more-than-$4 billion stake in Taiwan Semiconductor Manufacturing Co. (TSM -1.75%).
This stock is a worthy addition to Buffett's portfolio, as semiconductor manufacturing is deeply entrenched in the fabric of the global economy. All the Buffett hubbub aside, though, Taiwan Semi is dealing with some serious economic disruption, including a shortage of neon gas due to the war in Ukraine. The company said it's investing in neon production to help and it looks like Air Products and Chemicals (APD 0.49%) is getting in on the project.
If you're bullish on chip manufacturing like Buffett is, this old industrials stock -- and market-beating investment -- is worth a serious look right now.
A surprising bet on chip manufacturing?
The world has been struggling with a shortage of chips and the situation is not helped by the fact that the elemental gas neon used in the lasers during the chipmaking process is in short supply. Ukraine supplied about half of the world's neon before the Russian invasion but the capture of neon gas -- a byproduct of steelmaking production -- has come to a screeching halt there.
As recently reported by news outlet Nikkei Asia, Taiwan Semi says it's working on making its supply chain more resilient, partly by working with suppliers to create local production of neon in Taiwan, to be up and running within the next three to five years. The company is apparently actively buying equipment in preparation for this project, in addition to other initiatives to boost its locally sourced materials and recycled waste.
Interestingly, in a slide outlining its spending on future projects, Air Products has a line item for a $900 million project for a semiconductor manufacturer in Taiwan. Coincidence? I think not. Air Products is a top supplier of neon and could be an under-the-radar bet on the semiconductor manufacturing industry, one that could be even better than Taiwan Semi.
The case for Air Products and Chemicals
Taiwan Semi has said that Taiwan won't be able to supply all of its raw materials. The chip industry is a mind-bogglingly complex network that crisscrosses the globe, so building a self-contained and self-sufficient chipmaking operation in Taiwan simply isn't possible. Plus there's the geopolitical threat from mainland China, which still wants Taiwan back.
These factors make it little surprise that Taiwan Semi is diversifying its operations -- including in the U.S., where manufacturing has been in slow but steady decline for decades. A new Taiwan Semi chip manufacturing plant (or fab) in Arizona is nearly complete, and a second multibillion-dollar fab in the state is also being considered. Apple has reportedly been pushing the Taiwanese chip giant to bring the manufacture of some of its most advanced processor-making nodes (used in iPhones and other high-end Apple products) to American soil, perhaps by 2024.
Of course, this all sounds bullish for Taiwan Semi's long-term health. However, it's going to require tens of billions of dollars for all of these capital-intensive projects, and it's still unclear how much funding from the U.S. CHIPS Act will be used in support of Taiwan Semi's expansion efforts. Much of that $52 billion piece of legislation will be earmarked for U.S. companies including Intel and Texas Instruments.
Given the uncertainty, investors bullish on chip development could look to U.S.-based Air Products. While companies like Air Products and European peer Linde count tech manufacturing as just a high-single-digit percentage of total revenue, tech companies have been reported as a top growth vertical for these industrial gas and chemical companies. Linde, for example, said revenue to electronics companies grew 20% in its latest quarter.
With the U.S. putting effort into domesticating chip production, Air Products could make some serious hay on its home turf.
Another point to consider is the biggest finished product of chips these days: data centers, the backbone of the cloud. Data centers are popping up like weeds. They also consume massive amounts of energy. In a recent conversation I had with Manuvir Das, Nvidia vice president of enterprise computing, Das cited a report that computing will go from a roughly single-digit-percentage of total energy consumed today, to eventually up to 13%. That's another point for Air Products, supplier of industrial equipment and gases that could find their way into a growing number of these massive data centers.
Over the last decade or so, Air Products has been growing its earnings per share at about a 10% rate, plus sending a steadily growing dividend to its shareholders. In the next few years, the company thinks it can continue or even slightly improve on that track record of earnings and dividend growth. A deeper dive into Air Products' specific financials is a discussion for another time, but my point is this: Secular growth trends in the technology space could be slightly shifting in favor of hard asset companies like Air Products for at least a few years.
Taiwan Semi is probably a great buy for the long term, but it has a bumpy path immediately ahead of it as it deals with extreme economic disruption. Air Products and Chemicals, on the other hand, could be a lower-risk bet on the same semiconductor manufacturing theme. I plan on doing some more homework on this stock, and have it on my buy list.
