Don't Count Your Chips Just Yet

Don't Count Your Chips Just Yet In a 64-33 vote today, the Senate voted to approve the Chips and Science Bill, a measure that authorizes roughly $280 billion for U.S. manufacturing, including $52 billion in subsidies and grants for the U.S. semiconductor industry. The measure now goes to the House of Representatives for a final vote, then heads to President Joe Biden’s desk for his signature. That could happen by the end of the week.  Semiconductor stocks rallied on the news: the iShares Semiconductor exchange-traded fund (SOXX) rose 4.6%, Intel added 3.1%, Nvidia jumped 7.6%, and Advanced Micro Devices gained 5.4%. The bill includes financial incentives for companies to open new manufacturing plants inside the U.S. But Barron's chips expert Tae Kim thinks the measure is at best an "incremental positive" for the industry. He wrote today: While the $50-billion-plus number looks large on the surface, the magnitude shouldn’t be overstated as it will be spread out over five years, making the overall impact more limited. According to IC Insights, total semiconductor industry capital spending is estimated to grow 24% this year, to $190 billion. Assuming some growth over the next several years, the bill would be a modest single digit percentage of the aggregate spending over the five-year time period. The bill is “frankly, a rounding error given the scale of investments required in this space,” Bernstein analyst Stacy Rasgon wrote in a note last week. “While we do believe passage could be a modest positive for our sector and some stocks at least on sentiment, we do not believe it would have a hugely meaningful impact.” More high-paying manufacturing jobs and the national security benefits of domestic chipmaking are merits of the bill, but they won't change the chip industry's biggest problem these days. That has to do with economic fundamentals. Tae continues: The problem is the chip industry may now be facing challenges on the demand side—not the supply side. Demand for two of the industry’s key markets—computers and mobile phones—seems to be deteriorating rapidly amid the slowing global economy. ...Unfortunately for semiconductor companies, this may be the beginning of longer downturn without any turnaround for the intermediate future. Many consumers pulled forward their spending on computer electronics, laptops, smartphones, and other technology products when they were stuck at home during the pandemic. Most of these items don’t need to be upgraded or replaced for years, which could make for sluggish sales for the chip industry for some time to come. Until customers are convincingly growing their spending on semiconductors, the outlook for chip stocks isn't as rosy as today's bounce would make it seem. Read the rest of Tae's report here.