In the midst of a nasty recession, anyone looking to build a brand new $12 billion manufacturing plant really stands out.
And in this case, it’s not the price tag that is the most important part of the deal.
It’s the fact that it’s all about what lies at the heart of our fast-moving digital economy.
Of course, I’m talking about semiconductors. The new plant in Arizona, big enough to employ 1,600 people, will produce some of the most advanced chips ever released.
The news comes as the chip sector continues to post solid gains in a weak, COVID-focused economy.
For August, the last month for full data, global chip sales showed a yearly gain of 4.9% to $34.5 billion.
The chipmaker I have in mind is a global leader that has doubled the S&P 500’s return since the market bounced back on March 23.
They are relied on by some of the most prominent device makers in the world, like Apple Inc. (AAPL), along with chip designers like Intel Corp. (INTC), Advanced Micro Devices Inc. (AMD), and Nvidia Corp. (NVDA).
Let me show you why I see much more upside ahead…
It’s impossible to overstate the role semiconductor chips play in the modern world.
They power the smartphones, PCs, and laptops that billions of people work on, and the Internet that keeps those people connected.
Mining, farming, and shipping all the different resources we use nowadays also require chips.
As does the high-tech weaponry and military vehicles that keep us safe.
With the world’s largest economy and strongest military, it’s no wonder that America is a key market for semiconductors.
But you wouldn’t necessarily be able to tell from the global data I cited earlier.
Yes, as noted, chip sales showed a yearly gain of 4.9% to $34.5 billion in August. But that global average hides some enormous regional differences.
Let me break it out for you. On a year-to-year basis, chip sales were down 10.1% in Europe, down 1.4% in Japan, up 3% in China, and up 2.1% in the rest of Asia Pacific and the world.
Meanwhile, in the Americas, chip sales were up a whopping 23.6%!
Who says, the U.S. isn’t making a comeback? Just saying…
In other words, with the U.S. leading the way, the Americas are responsible for almost all the growth in chip sales, even in the middle of a pandemic and recession.
So, you can see why the global leader in semiconductor manufacturing would be looking to build its next plant right here at home.
Especially as it would put it much closer to the American companies whose designs the firm manufactures.
The Biggest and Smallest
The company I’m talking about is Taiwan Semiconductor Mfg. Co. Ltd. (TSM), often called TSMC. They’re the world’s largest semiconductor foundry.
But don’t worry if you’ve never heard of them, because you’ve definitely used their chips.
See, wildly successful chip companies such as Advanced Micro Devices Inc. (AMD), Nvidia Corp. (NVDA), Broadcom Inc. (AVGO), Qualcomm Inc. (QCOM), even Apple Inc. (AAPL), not to mention many others, don’t actually make their own chips.
They design them and outsource the manufacturing to TSMC.
Even Intel Corp. (INTC) has had to rely on TSMC for some chip manufacturing. That’s partly because TSMC has been beating Intel for years in the race to make smaller chips.
See, the smaller a semiconductor chip is, the less power it leaks and the cooler it runs. So smaller chips are faster and more efficient than larger ones.
Chip size is usually measured by how wide a single transistor is. In 2018, TSMC started making 7nm chips while Intel was still stuck making 10nm ones.
Intel was supposed to catch up this year, but in July announced that it wouldn’t hit the 7nm milestone until early 2021.
But by that point, TSMC will be well on its way to starting production of the next generation of ultra-compact chips at the 3nm level.
Top chip designers such as Apple, Nvidia, and AMD are already knocking at TSMC’s door to be the first to get to use those robust devices.
So, it makes sense for the company to put its next semiconductor plant right here in the U.S.
As this year’s COVID pandemic has shown, travel restrictions can cause huge delays in chip manufacturing, as engineers from these American companies can’t fly to TSMC’s factories to oversee testing and production.
Not to mention that TSMC’s current factories are all in China and Taiwan, putting all its production capacity in one basket. The only exceptions are two older plants, one in Singapore and one in Washington state.
A new, state-of-the-art plant in America, the firm’s fastest-growing region, makes perfect sense for TSMC. And, as I mentioned earlier, the Arizona facility is expected to create 1,600 jobs.
Now, the company has been vastly improving its operations recently, to set the groundwork for even more growth.
So, while TSMC’s earnings per share has only grown by 4% over the last three years, that number is expected to jump to 47% in 2020.
Smack in the middle of a pandemic and recession, mind you.
But to be conservative, let’s cut that number in half to 23.5%. At that rate, it would take TSMC just three years to double its earnings.
This is not only a play on the global leader in semiconductor chip technology and manufacturing. It also proves that tech will be a part of the American comeback.
And you can bank on that for the long haul. But, on top of all of that, it’s a standout example of the importance of finding the best way to make money during chaotic market conditions.
Cheers and good investing,
— Michael A. Robinson