Semiconductors, coronavirus crisis, shortage of global supply, a new law to strengthen the semiconductors industry. Life sometimes gets too complicated and business is no exception either. Who would’ve imagined the novel coronavirus pandemic disrupting the global economy in such myriad ways?
Take for example the recent global shortage of semiconductors, which caused severe problems for major auto manufacturers and led to production pauses.
The global semiconductor market has been negatively affected by the COVID-19 pandemic. The U.S. semiconductor industry has nearly half the global market share and in 2019 global sales of semiconductors were estimated at $412.3 billion.
It is a very large market. Hard to ignore when it faces business problems, and it’s no wonder why the semiconductors industry is the top priority for the U.S. government.
CHIPS for America Act: Boosting Semiconductors Industry
The CHIPS for America Act (CHIPS stands for Creating Helpful Incentives to Produce Semiconductors) will support and increase the U.S. competitiveness in the sector. It is focused mainly on domestic semiconductor R&D and manufacturing:
“The bill establishes investments and incentives to support U.S. semiconductor manufacturing, research and development and supply chain security.
Specifically, the bill provides an income tax credit for semiconductor equipment or manufacturing facility investment through 2026. The bill also establishes a trust fund to be allocated upon reaching an agreement with foreign government partners to promote (1) consistency in policies related to microelectronics, (2) transparency in microelectronic supply chains, and (3) alignment in policies towards nonmarket economies.”
In theory, this Act seems positive for the U.S. semiconductors industry. But in reality, there is a big issue, that several semiconductors stocks and companies will not like at all. The Act will make some sectors a priority, which will be very helpful for the companies in those sectors but would not be ideal for others.
The Biden Administration is focusing on strengthening the supply chains of key products, including semiconductor chips. And some sectors that may benefit include defense, public health and biological preparedness, energy and food production, large capacity batteries, active pharmaceutical ingredients and critical and strategic materials.
Recently major tech companies protested against this sector partiality. Some of the companies in this letter addressed to the Congress and White House officials include Advanced Micro Devices (NASDAQ: AMD), Intel (NASDAQ: INTC), Qualcomm (NASDAQ: QCOM) and Texas Instruments (NASDAQ: TXN).
3 Stocks That Could Actually Be Hurt By the CHIPS Act:
- Microchip Technology (NASDAQ:MCHP)
- Maxim Integrated Products (NASDAQ:MXIM)
- Skyworks Solutions (NASDAQ:SWKS)
Let’s take a closer look.
Microchip Technology (MCHP)
Microchip Technology develops, manufactures and sells semiconductor products for a large variety of applications control applications in the U.S.A., Europe and Asia. The company offers both general purpose and specialized microcontrollers and embedded microprocessors for business sectors such as automotive, industrial, aerospace, office communication and computing applications.
The company has a current market capitalization of $41.61 billion. Sales in 2020 amid the pandemic were marginally affected, with a moderate decline of 1.41% to $5.27 billion compared to revenue of $5.35 billion in 2019. Research & Development costs reported in 2020 were $877.8 million while net income was $570.6 million.
As the CHIPS for America Act has a priority on Research & Development, that implies that any further increase in those costs for Microchip Technology could harm profitability and free cash flows if there are more capital expenditures. In 2020, net income surged to $570.6 million, an increase of 60.33% compared to the net income of $355.9 million in 2019.
Maxim Integrated Products
Maxim Integrated Products is an even smaller company than Microchip Technology. It has a market capitalization of $25.429 billion. Maxim Integrated Products designs, develops, manufactures and markets a wide range of linear and mixed-signal integrated circuits in the United States, China, Europe and internationally. The company also provides business solutions for the automotive, communications and data center, consumer and industrial markets.
For the past two years, there has been a decline in sales growth and the Research & Development costs remain rather stable at about $450 million per year for the past four years. The company saw its net income decline by 20.88% in 2020 to $654.69 million.
Again the percentage of Research & Development costs to net income is high and this implies that any increase in research and development costs could harm the profitability of the company and negatively affect operating margins and capital expenditures.
Skyworks Solutions (SWKS)
Skyworks Solutions has a market capitalization of $30.809 billion and is the second-largest company on this list. Together with its subsidiaries, Skyworks Solutions designs, develops, manufactures and markets proprietary semiconductor products in the United States, China, South Korea, Taiwan, Europe, the Middle East, Africa and the rest of Asia-Pacific.
The company provides its products for use in the aerospace, automotive, broadband, cellular infrastructure, connected home, entertainment/gaming, industrial, medical, military, smartphone, tablet and wearable markets.
Sales growth saw a minor decline of 0.62% in 2020 but Research and Development costs have been steadily rising for the past four years. In 2020, Research and Development costs were $464.1 million. That’s about 57% the company’s net income of $814.8 million reported in 2020. Plus, net income has declined for the past three consecutive years. EBIT after Unusual Expense has been falling for the past two consecutive years. Again, any increase in the Research and development costs will harm the profitability of the company.
All three of these semiconductor stocks and companies have two things in common. First, they all provide solutions to the automotive industry. Remember, the automotive industry was one of the main sectors that had a shortage in chips and complained to the U.S. Administration about it. Second, these companies are not the largest in the semiconductors industry and with the focus of the CHIPS Act on research and development, their profitability may be at high risk.
On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.