As one examines the landscape of the semiconductor industry, it becomes hard to escape its sensitivity to some geopolitical events.
According to a recent Congressional Research Service report, approximately 35% of global wafer fabrication capacity for all logic chips resided in Taiwan in 2020. In addition, a joint report by the Semiconductor Industry Association (SIA) and Boston Consulting Group (BCG) says that Taiwan accounts for a whopping 92% of wafer fabrication capacity for advanced logic chips -- chips manufactured using a technology process of under 10nm -- globally.
The leading wafer fabrication company in Taiwan, Taiwan Semiconductor Manufacturing (TSMC), counts the likes of Nvidia, Apple, AMD, and Qualcomm among its major clients.
The risks created by that concentration are made worse by China's threats to invade Taiwan. While one can cite valid reasons why that will not happen, the possible consequences of such an event make it prudent for investors to hedge against such a possibility. Given the state of the industry, the hedge of choice is likely Intel (INTC +1.15%) stock.
NASDAQ: INTC
Key Data Points
Why Intel makes an excellent hedge
Admittedly, choosing Intel may seem counterintuitive on some levels. For one, TSMC became dominant in part because Intel lost its technical lead in chip manufacturing in the 2010s. Moreover, most market observers perceive Samsung as a more technologically advanced manufacturer than Intel.
However, Samsung does not trade on U.S. exchanges. Also, the iShares MSCI South Korea ETF invests 23% of its assets in Samsung, giving it limited value as a hedge.
By contrast, Intel stands out because it operates more fabs on U.S. soil than any other company. If sourcing chips from Taiwan at some point ceases to be an option, Intel's facilities will become more valuable to its fabless peers. That could increase Intel's appeal if other semiconductor stocks faced uncertainty.
Also, under CEO Pat Gelsinger, Intel has opened its manufacturing facilities to its competitors by launching Intel Foundry Services. It already counts Nvidia, Boeing, and the U.S. government among its client base, and as Intel Foundry Services improves its capabilities, more prospective customers will likely turn to it.
Additionally, it is spending $100 billion to expand its production capacity in four U.S. states and an additional 33 billion euros ($36 billion) to construct foundries in the European Union. Part of the $100 billion it will spend domestically will come from funds distributed by the U.S. government under the CHIPS Act, an initiative to incentivize chip production in the U.S. Intel is receiving an $8.5 billion grant from the Commerce Department, will receive a tax credit of up to 25% on the money it spends to boost chip production, and is eligible for up to $11 billion in federal loans.
Furthermore, Intel has bolstered its competitiveness by buying high-NA EUV (extreme ultraviolet) lithography machines -- the most advanced semiconductor production equipment on the market -- from ASML. Such machines will help Intel compete with TSMC and Samsung, and help it fulfill its pledges to regain the technical lead by 2025 and become the No. 2 foundry by 2030.
The state of Intel's stock
The company's moves to grow its capacity and upgrade its technological capabilities should pay off in time, which in turn should bolster Intel's stock price. Nonetheless, those will be longer-term tailwinds. Amid the recent slump in the chip industry (at least, outside the AI chip niche), Intel's 2023 revenue fell by 14% to $54 billion.
Despite that decline, the company's revenue picture is likely improving as its top line grew 10% year over year in Q4. Also, revenue from Intel Foundry Services rose by 103% in 2023 to $952 million, an early sign of success for that business segment.
Moreover, the profit picture reflected the same trends. Net income suffered a brutal 83% drop to $1.7 billion in 2023. However, its $2.7 billion profit in Q4 points to the likelihood of a significant rebound in 2024.
With that anticipated recovery, Intel trades at a forward P/E ratio of 31. That's a more expensive valuation than TSMC, but a cheaper one than design companies such as AMD or Nvidia. Arguably, Intel is trading at a fair valuation level.
INTC PE Ratio (Forward) data by YCharts.
Moving forward with Intel
Ultimately, a fair valuation and Intel's fab footprint outside of Taiwan are excellent reasons for semiconductor investors to think of Intel's stock as "insurance."
Intel still has much to prove before it can reclaim a leadership position in its industry. Yet even under a worst-case scenario, its significant production capacity outside of Taiwan will increase the chipmaker's importance.
Moreover, Intel stock could perform well in a world in which geopolitical tensions have eased. The growth of Intel Foundry Services, thanks to its improving and expanding capacity, should make Intel more competitive and increasingly able to meet the needs of fabless chip companies. If investors stay patient, they could win with Intel stock regardless of world events.
