It’s a tricky environment for semiconductor stocks.
We already knew that last month the U.S. began restricting exports of high-end GPUs to Russia, Hong Kong, and mainland China. The Biden Administration had sent letters to Nvidia (NVDA) requiring a license to sell its A100 and H100 chips that are designed to speed machine learning and artificial intelligence to those three regions. Nvidia stated at the time that the restriction likely jeopardized… for the firm, up to $400M in annual revenue.
Advanced Micro Devices (AMD) was similarly informed that a similar restriction would be placed on that firm’s MI250 chips. AMD did not feel that its M100 chips were part of the new license requirement and that if so, the new rules would not have a material impact on the firm.
Monday morning we learned that the Biden administration is likely to intensify and broaden those restrictions. The Commerce Department is expected to publish new guidelines constructed from letters sent to Applied Materials (AMAT) , and former Sarge faves Lam Research (LRCX) and KLA Corp. (KLAC) .
Restrictions will be placed on equipment that could be sold to China in order to protect U.S. national security and foreign policy interests. This means trying to eliminate U.S.-based technology from contributing to the improvement or enhancement of Chinese military capabilities.
This news comes on top of the Chips and Science Act, passed this summer to increase U.S. semiconductor independence and create a more competitive environment for U.S. chip manufacturers (foundries). What the act does for U.S. chip designers is less clear.
Tackling It All
Trading in this group started to feel a little dicey much earlier this year. I had abandoned my long position in Nvidia first as that stock, well before the company even warned, had been priced for perfection. Once it became known that the cryptocurrency business would likely dry up to the changes being made to Ethereum, and then those markets crashed, it did not take much to pull that trigger. Some of the other names that have/had been Sarge faves were more difficult plays.
I have long felt that I need to be invested in the data center, in 5G expansion and in artificial intelligence. Advanced Micro Devices and Marvell Technology (MRVL) cover those bases, though in self defense, I have had to trim those positions as well, despite both of those stocks trading at roughly half of the current valuation of NVDA in terms of forward-looking earnings multiples. I leave roughly 25% of my AMD long in place and roughly 50% of my MRVL long. Really, that was based on the need to raise cash going into an uncertain period. The moves served to protect at a time my portfolio needed protecting.
Is it time to get back in, or at least increase exposure to the group?
The group has started to turn for the better. The Philadelphia Semiconductor Index is still down 31% year to date. Nvidia is down 51%, AMD 41%, and MRVL 43%. I think maybe MRVL is in the best spot of the three for the short-term, but I will never give up on AMD’s Lisa Su.
So, I will be in these two names going forward. But NVDA? Still too expensive, in my opinion. Replace NVDA with Intel (INTC) in my portfolio?
Intel, a former titan of technology, has become a laughing stock. Last quarter, Intel reported a GAAP loss, adjusted earnings that dropped 79% and revenue that decreased 22%. Say one thing about CEO Pat Gelsinger, he certainly has not fixed Intel. If anything, the firm’s decline has only accelerated as AMD has eaten Intel’s lunch in many areas where they compete head to head.
However, Intel is making strides and spending money to become a chip foundry, perhaps America’s foundry. That’s where the government money is going. That’s why Taiwan Semiconductor (TSM) is building here. That’s why GlobalFoundries (GFS) is trading closer to the top of its chart than the bottom.
So, really… I think I want to add either GFS or INTC just because how can INTC really be this bad and stay this bad? GFS trades at 21 times forward-looking earnings and pays no dividend. INTC trades at 13 times and yields 4.6%. They both have solid balance sheets. Intel trades at less than two times tangible book. GFS trades at almost four times tangible book.
I really can’t believe I am going to do this… but I think the time has come for me to get involved in INTC for the first time in a long time, based on valuation and the fact that they are going to be in the government’s sweet spot.
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