The CHIPS Act delivers a temporary boost for semiconductor stocks

After years stuck in the White House void, a $52B legislative package aimed to boost domestic chip manufacturing is nearing the finish line.

America’s chip manufacturing was once great

…Then, its dominance eroded over the past 30 years. The U.S.’ global share fell from 37% of global semiconductor manufacturing to just 12%.

Manufacturing moved to Asia — fuelled by subsidies and cheap labor. Today, Taiwan Semiconductor Manufacturing (NYSE:TSM) makes up half of the industry’s sales.

To revitalize American chip manufacturing, the bipartisan CHIPS Act legislation was introduced in 2020 — including $52B in subsidies and tax credits for chip production and research.

But the bill stalled with disputes even as chip shortages ravaged the economy. So what did the tech industry do?

• American chip manufacturers held their U.S. expansions conditional on the bill.
• One hundred tech companies, including Alphabet and Microsoft, sent a letter to lawmakers urging Congress to pass the bill.

Spending tilts in one direction

Now it seems like their threats prayers are being answered as the final passage could arrive next week. The bill applies to manufacturers but not chip designers —disproportionately benefiting certain chipmakers:

• Benefits firms like Intel, Texas Instruments and Micron — who manufacture their own chips.
• No direct benefit for firms like AMD, Nvidia and Qualcomm — who design the chips but outsource manufacturing.

U.S. chipmaker Intel (NASDAQ:INTC) stands to gain the most — potentially receiving $20B of the funding. Intel has plans to invest $100B into a new mega manufacturing center in Ohio — threatening to pull out if the CHIPS package fails.

Investors: The bigger concern for chip stocks

The bill could temporarily boost chipmakers, but the industry has bigger problems. The chip market is slowing, and a recession risks sending demand lower.

• Last Friday, Goldman analysts reduced the 2023 earnings forecasts of semiconductor companies by 20%. Some worse than others…
• At the extreme end, they cut Intel’s earnings forecast by 46% and ON Semiconductor’s by 42%.

Citigroup analyst Christopher Danely thinks semiconductor stocks could fall another 15% this year. It could also take months for the money to be distributed and years before the industry sees results.