With President Joe Biden expected to sign a spending bill designed to bolster the domestic semiconductor industry in light of the Covid-19 pandemic’s supply chain disruptions, several chip stocks have grabbed the spotlight to start the month of August. While not every company has benefitted from the development, shares of Advanced Micro Devices (NASDAQ:AMD), Nvidia (NASDAQ:NVDA), Taiwan Semiconductor (NYSE:TSM) and ON Semiconductor (NASDAQ:ON) have captured investors’ attention.
Two major developments undergird chip stocks at the present juncture. First, the CHIPS and Science Act could represent a seminal moment for economic stability, potentially addressing supply chain vulnerabilities for semiconductor production as well as reinvigorating scientific research and maintaining broader U.S. leadership in the technology sector. Perhaps most importantly, amid a rancorous political environment, the CHIPS Act provided a rare opportunity for bipartisanship.
Second, chip stocks generally received buoyant trading action stemming from Onsemi’s robust second-quarter earnings performance. The tech firm delivered adjusted earnings per share of $1.34 on revenue of $2.09 billion. Covering analysts anticipated that ON stock would post adjusted EPS of $1.25 on sales of $2.01 billion. Per Investor’s Business Daily, ON earnings jumped 113% while sales climbed 25% on a year-over-year (YOY) basis.
Still, the irony for chip stocks is that while Onsemi posted very encouraging results for its underlying sector, ON stock is down about 5% in early afternoon trading, reflecting forward-looking concerns about the semiconductor space.
Chip Stocks Face an Ecosystem Fraught With Risk
For Onsemi, in addition to good ole fashioned profit-taking, Wall Street could have responded to the read-between-the-lines dynamic that its Q2 report presented. For instance, Onsemi CEO remarked that:
Our leadership in the accelerating megatrends of vehicle electrification, ADAS (advanced driver-assistance systems), energy infrastructure and factory automation have enabled us to extend long-term supply agreements and increase demand visibility.
While these attributes clearly have positive implications, economic realities could hurt ON and other chip stocks. For instance, the average price for an electric vehicle in 2022 soared to nearly $63,000, imposing a hardship on many middle-income households seeking to make the transition to cleaner power. Also, energy-related investments along with automation protocols depend on economic stability: lower consumer demand can possibly negate such investments.
To be fair, domestic chip stocks like AMD and Nvidia may be rising on longer-term implications that the CHIPS Act may reinvigorate the namesake industry. As well, investors may be anticipating that these firms will be better insulated from future disruptive events.
However, TSM stock has struggled in Monday afternoon trading, perhaps on expectations that House Speaker Nancy Pelosi will visit Taiwan. If so, the move could enflame already bitter U.S.-China relations, posing significant risks for the economy as well as geopolitical stability.
Why It Matters
Though the consensus opinion may be that U.S.-based chip stocks will benefit from the aforementioned piece of legislation, the bill does not feature universal approval. For instance, a Bloomberg article recently warned that the CHIPS Act could become a $280 billion boondoggle.
Other critics have weighed in, stating that the “measure contains no accountability requirements for companies that receive the taxpayer dollars, will increase the national debt and 40-year-high inflation, and won’t strengthen national security.”
Therefore, while the headline numbers seemingly bode well for chip stocks generally, investors need to be careful about overextending themselves on any one potential driver.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.