Chips Stocks, Hit by Rising Rates and China Tensions, Are Down but Hardly Out | Barron's 2022/10/27

2022/10/27 上午8:20

TECHNOLOGY STREETWISE

This Isn’t a Chip Winter. It’s a Chip War.

By Jack Hough Follow Updated October 24, 2022 / Original October 21, 2022

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6 minutes

This past week, a company called Lam

Research predicted a massive revenue
shortfall, and its shares jumped 8%.
There’s a simple reading here for value
investors, and a thornier story about
world powers and war-making.

The wild swings in chip-making profits

ASML has a monopoly in the most advanced type of
from the days when Microsoft Windows
circuit-drawing, called extreme ultraviolet lithography. releases drove demand for home
Courtesy of ASML
computers have given way to steady,
powerful growth from the cloud, smartphones, and all manner of connected machines.
Over the decade through last year—a heady one for stock investors—money tracking
the Philadelphia Semiconductor Index grew 12 times, including dividends, versus four
times for the S&P 500.

Chip Winter or Time to Buy?

00:00 / 20:16 1x

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This year, things look different. The SOX, as the Philly chip index is called by frequent
ticker checkers, has collapsed by 42%, or twice as much as the broad market. The
pandemic has brought the industry back to its old volatility. First, soaring demand for
home-office devices and appliances met shipping and manufacturing bottlenecks.
More recently, supplies are flowing freely, but demand is drying up, not least because
rising interest rates threaten a recession. And the U.S. just struck a devastating blow to
China’s chip sector. (More on that in a moment.)

A long-term chip winter seems unlikely, given trends like rising artificial intelligence
and self-driving cars. The SOX traded recently at 14 times forward earnings projections,

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down from an average of 18 times over the past five years. Time to buy? “It’s getting
close,” says Needham analyst Quinn Bolton. “I don’t know if you have to buy today.”

Bolton is waiting for companies to slash earnings predictions, perhaps later this year.
But estimates don’t have to hit bottom, he says, pointing to a late 2018 selloff amid
rising rates. “The semiconductor index in 2019 rallied almost throughout the year, even
as estimates were coming down,” he adds.

For now, Bolton recommends companies that are less tied to the industry downturn.
MaxLinear (ticker: MXL) makes products for broadband infrastructure like modems,
and trades at seven times earnings—“way too low for the quality of the business,” says
Bolton. Macom Technology Solutions Holdings (MTSI) is more expensive, at 18 times
earnings, but Bolton likes that nearly half of sales are tied to defense.

For investors seeking broader exposure now or later, there’s the iShares
Semiconductor exchange-traded fund (SOXX). It includes U.S. companies that make
many kinds of products, including logic chips for processing information and memory
for storing it, as well as machines for chip-making. Speaking of which...

China-born David Lam studied at MIT and worked at U.S. computing pioneers like
Texas Instruments and Hewlett-Packard when the industry was experimenting with a
new way to draw circuits on silicon, called plasma etching. A 1978 capital-gains tax cut
loosened up venture capital, and Lam launched his company two years later. His main
innovation was to automate plasma etching so that chip makers would be satisfied
with the reliability.

Today, Lam Research (LRCX) is a big Silicon Valley employer—and a key part of U.S.
leverage in a chip showdown with China. There are only a few other companies that
make machines for putting circuits on high-end chips: California’s Applied Materials
(AMAT), Tokyo Electron (8035.Japan), and ASML Holding (ASML), which has a
monopoly in the most advanced type of circuit-drawing, called extreme ultraviolet
lithography. ASML is Dutch, with operations in Connecticut and heavy reliance on a
private German company called Carl Zeiss SMT, which supplies the world’s flattest
mirrors.

Investors think of chips as powering consumer goods, but governments see them as

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weapons, says Tufts University professor Chris Miller, author of a new book, Chip War:
The Fight for the World’s Most Critical Technology. It’s impossible to say which chips
will be put to undesirable ends; the 3-D rendering of videogame consoles can power
marathon Fortnite sessions or, with some rejiggering, real-world missile guidance.

“The conclusion has been that an effort to just stop chips going to the Chinese military
has failed,” says Miller. “And as a result, the U.S. wants a greater bifurcation of the chip
supply chain.” Its plan is to foster a non-China supply chain that includes the U.S.,
Taiwan, South Korea, Europe, and Japan, ultimately leaving China to rely on outdated
chips. Crucially, the new export controls extend beyond U.S. companies to overseas
ones that use U.S. components. Any company that hopes to sell to U.S. customers will
feel pressure to comply. China spends as much on imported chips as it does on oil, and
would like to make more high-end ones for itself. But developing technology like Lam’s
could take a decade, and getting around a ban on hulking, $100 million machines
won’t be easy. “For now, it’s impossible,” says Miller.

ASML says the export ban won’t hurt much next year—it has customers waiting. Lam
said this past week that next year’s revenue will fall short of expectations by $2 billion
to $2.5 billion, or about 12%. The stock’s reaction suggests investors feared worse.
Shares recently fetched 11 times earnings.

Meanwhile, the U.S. is spending to promote high-end chip production at home. The
goal is to take some production from Taiwan, where more than 90% of the most
advanced chips are made. China is a key Taiwan customer, but so is Apple (AAPL), and
the world-beating success of Taiwan Semiconductor Manufacturing (2330.Taiwan) has
relied on machines from ASML and the others.

This is dicey. China claims Taiwan as its own, but it doesn’t exercise control. The U.S.
stance has long been strategic ambiguity toward Taiwan, but it has been ramping up
deals to supply it with weapons. TSMC is building a $12 billion chip factory in Arizona.

In a survey last year, few Taiwanese said they want either full independence from China
or unification. Most want things to go on as they are. In chips, it’s already too late for
that.

Write to Jack Hough at jack.hough@barrons.com. Follow him on Twitter and

subscribe to his Barron’s Streetwise podcast.

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