There's plenty of worry out there about what would happen to the global economy if China ever made a more aggressive military push to take back the island of Taiwan. Amid this worry, many companies and government organizations have been pushing Taiwan Semiconductor Manufacturing (TSM 2.84%) -- far and away the largest chip foundry on the planet and a recent addition to Warren Buffett's stock portfolio -- to diversify production into other countries.
Lo and behold, Taiwan Semi just announced a second fab (a chip manufacturing facility) in the state of Arizona, over a year before its first facility there is complete. The total investment in the two fabs will be in the ballpark of $40 billion.
Image source: Getty Images.
This sounds like fantastic news for Taiwan Semi, as well as for chip designers Apple (AAPL 0.64%) and Nvidia (NVDA 3.65%), which will be among the first customers of the new fabs down in the southwestern desert. But two lesser-known names could be the best way for investors to profit: Applied Materials (AMAT 2.00%) and ASML Holding (ASML 3.38%).
Lots of silicon, but a lot of equipment to fill a fab with first
Taiwan Semi said its first fab will begin cranking out silicon wafers (those big circular discs you see being held by someone in a lab suit above) in 2024, using an enhanced version of its 5-nanometer manufacturing technology (the nanometers referring to the size of the transistors within a chip, with smaller sizes representing more powerful chips). The second fab will start production in 2026 using 3-nanometer tech. Together, the company said it could produce 600,000 silicon wafers a year at max capacity.
For reference, Taiwan Semi's 5-nm and 3-nm manufacturing processes create 300-millimeter wafers (just shy of 12 inches in diameter). Each wafer thus has 113 square inches of surface area (high school geometry here: 𝞹 x 6" radius squared), meaning Taiwan Semi could produce nearly 68 million square inches of silicon wafers every year. Sound like a lot? It is. But bear in mind some 14.7 billion square inches of wafers will be shipped in 2022 alone (according to industry association SEMI). That number is expected to increase by about a mid-single-digit percentage over the next few years.
At any rate, though Taiwan Semi's $40 billion investment will add little to the total global chip production capacity, it's still an incredibly high-value project. These days, the most advanced chips require incredibly complex manufacturing equipment to produce. That's where Applied Materials and ASML come in. As Taiwan Semi constructs its two new fabs, it will be filling up those facilities with advanced machinery from its longtime partners Applied and ASML, with some pieces of equipment (specifically, ASML's extreme ultraviolet lithography machines) costing a couple hundred million dollars apiece.
In other words, new fabs like the ones being built in the Grand Canyon State mean more growth for Applied Materials and ASML now while Taiwan Semi shareholders wait for that new output to go live.
Another boom in chip demand is coming
In 2022, global chip sales (the actual end product, not the wafers themselves) are expected to be around $600 billion. That's up from just over $400 billion in 2019 before the pandemic. The booming demand for silicon-based devices isn't going away anytime soon, though. Analyst and industry estimates now point toward global chip sales surpassing $1 trillion no later than 2030.
It won't be a straight-uphill growth trend. For example, the value of chips sold is expected to dip slightly in 2023. However, big-ticket consumer goods like automobiles and home appliances are joining the digital era and will look a lot more like your smartphone in the coming years. Something similar is happening in the industrial world, where equipment of all sorts is getting hooked up to a network connection. 5G network infrastructure construction is ongoing, as are data center build-outs to support artificial intelligence and other high-end computing in the cloud.
Besides supporting new fabs in Arizona, Applied Materials and ASML will also be involved in the construction of other sites like Intel's (INTC -0.38%) planned mega-fab in Ohio. Dozens of other facilities, like the other 17 fabs that Taiwan Semi owns in Taiwan and China (and one small fab in Washington state), will also need upgrades. Fab equipment also gets old and needs replacing, which also means ongoing sales for Applied and ASML, not to mention ongoing service and software fees.
Taiwan Semi, Intel, and others will get some government assistance via legislation like the U.S. CHIPS Act during this boom in capital spending. However, it remains unknown how profitable these companies will be along the way -- or how profitable they'll be once this boom is all said and done.
Fab equipment sales, though, tout high margins and cost what they cost, regardless of consumer and business end-demand for chips (which impact manufacturer profit margins). As these machines get more complex, the price tag on them goes up too, which is boosting Applied's and ASML's margins.
Data by YCharts.
As of this writing, Applied Materials and ASML shares trade for a respective 14 and 40 times trailing-12-month earnings (or a respective 20 and 25 times trailing-12-month free cash flow). Both had a tough year in 2022 due to supply chain issues and shifting government restrictions on sales to China, but both have managed to continue growing anyway. With years of boom time ahead for the chip fabrication industry, shares of these two companies look like a solid value -- and one of the best ways to profit from the coming explosion in fab spending.
