Made In The U.S. Of AI: Investing In The Chipmakers Of America

Photo by Mohamed Nohassi on Unsplash

American ingenuity has powered every “Big Tech” mega trend for the last 150 years. From automobiles in the early 20th century to the internet at the turn of the 21st century, and now with artificial intelligence (AI), American businesses always seem to lead the charge when it comes to cutting-edge technology.

And early investors typically make a fortune as a result. Throw just a few thousand dollars into Microsoft, Apple, or Nvidia at the right time, and you’ll find yourself counting your millions a few years later. These are the kinds of profits investors spend their whole lives searching for.

It’s why hot tech stocks command sky-high premiums. It’s also the reason why foreign investors are piling into American tech stocks. Foreign ownership of American stocks shot up six-fold between 2002 and 2021, according to the Wharton School of Business.

But there’s still one last speed bump on the road to America’s continued AI dominance: Semiconductors.

The High-Tech Arms Race of the 21st Century

It’s going to take massive amounts of computing power to unleash the next generation of AI. So we’re going to need more computer chips than ever before. Right now, almost all of our best semiconductors are manufactured in the tiny island nation of Taiwan.

This means the we're almost wholly reliant on another country for one of our economy’s most critical resources. And that country also happens to be under increasing pressure from its neighboring China.

We all felt that dependence during the post-COVID-19 chip shortage. And the government committed to taking action. The CHIPS and Science Act is the Biden Administration’s answer to our foolish dependence on foreign manufacturers — particularly in the semiconductor industry.

Signed into law on Aug. 9, 2022, the CHIPS Act is providing more than $50 billion for American semiconductor research, development, manufacturing, and workforce development. It further offers a tax credit of 25% for companies that invest in chipmaking equipment.

Already, a number of large tech companies are announcing plans to increase investment in the space.

Memory chipmaker Micron Technology Inc. (MU) jumped on the opportunity with a pledged $40 billion investment in production capacity, which promises to increase the global market share of American-made memory chips from 2% to 10%.

Qualcomm and GlobalFoundries were also quick to form a partnership that will include a $4 billion investment in the latter’s New York facility, with projections of growing total production by 50% over five years.

And now, even Taiwan Semiconductor Manufacturing Company (TSM) is beginning to ramp up its stateside production…

Not All Chipmakers are Equal

On Monday morning, executives from Taiwan Semiconductor's Arizona subsidiary finalized an agreement to receive up to $6.6 billion in cash incentives. They’ll also be eligible for an additional $5 billion in loans under the CHIPS Act.

If that sounds like a lot of money, consider that Taiwan Semiconductor is investing $65 billion to build three new fabrication plants in Arizona. According to Commerce Secretary Gina Raimondo, these new plants will bring “the manufacturing of the world’s most advanced chips to American soil.”

Building these new facilities will reduce the risk of another prolonged chip shortage and virtually eliminate interference or embargos from China. That means smooth sailing for America’s rapidly growing AI industry.

But it doesn't mean that all chipmakers are equal. For example, take a look at the Green Zone Power Ratings for Taiwan Semiconductor.

Taiwan Semiconductor (NYSE - TSM) Stock Power Rating

(Click on image to enlarge)

Image Source: Money&Markets

A “Bullish” 72 out of 100 is a solid rating, especially for a business that already has a near-monopoly in its industry. There’s clearly plenty of room for Taiwan Semiconductor to keep growing if management can keep things on track.

Meanwhile, here’s how Micron Technology rates.

(Click here to view MU’s stock rating page.)

(Click on image to enlarge)

Image Source: Money&Markets

31 out of 100, with negative earnings per share. Each stock’s Green Zone Power Ratings are based on a combination of fundamental and technical factors. And as you can see above, Micron is a bad investment on both fronts.

Even with billions in government aid pouring into the company, shares are still likely to underperform over the next 12 months.

That’s why I often recommend checking ratings early and often when you’re thinking about investing, if you’ve already invested, or you just read about a stock in a news story. Because two companies like these are often mentioned in the same breath on CNBC or in the Wall Street Journal -- even though they’re vastly different investments.

The race for semiconductor dominance is going to be a dominant mega trend in these early stages of the global AI boom. And that’s great news if you’re invested in the right chipmakers. Stay tuned for more updates as this trend develops.

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