Semiconductors August 25, 2025 12:56 AM GMT Semiconductors | North America Weekly: Intel and the Government; Feedback Around NVIDIA Preview; MRVL and AMBA Preview We see Intel's government investment as a pullback from foundry commitments. Meanwhile, China uncertainty actually clarifies and helps the NVDA setup. We also touch on other upcoming prints, and make the case for optimism on MRVL and MU. INTC issuing equity to the government for cash that they already were expected to receive. Intel and the govern ...

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Core Viewpoint - Intel's stock rose nearly 4% on Friday, accumulating an 11% increase over two days, amid reports that the Trump administration is exploring the possibility of acquiring equity in Intel using funds from the U.S. Chips Act [1] Group 1: Financial Implications - Intel is the largest expected beneficiary of the Chips Act, having already secured $7.9 billion in semiconductor manufacturing grants [1] - The company is also set to receive up to $3 billion in grants for the Pentagon's secure enclave program and has obtained $11 billion in loans under the 2022 legislation [1] Group 2: Government Negotiations - Discussions are in early stages regarding whether to convert part or all of Intel's existing Chips Act grants into equity, allocate new funds, or combine Chips Act funding with other financing sources [1] - The government aims to quickly utilize unused Chips Act funds for sectors deemed critical to U.S. national security [1] Group 3: Leadership and Stability - Intel's CEO, Pat Gelsinger, met with President Donald Trump, and despite previous criticisms from the President, his position appears secure [1] - The discussions surrounding funding sources remain unstable and have not been reported previously [1]

Summary of Conference Call Notes on Taiwan Semiconductor Industry Industry Overview - **Industry**: Semiconductors - **Key Companies**: TSMC (Taiwan Semiconductor Manufacturing Company), GlobalWafers (GWC) Core Insights and Arguments 1. **US Tariff Announcement**: On August 6, 2025, President Trump announced a proposed 100% tariff on imported semiconductor chips, with exemptions for companies building manufacturing facilities in the US [1] 2. **Impact on TSMC and GWC**: TSMC and GWC are likely to be exempt from the tariff due to their US operations and expansion plans, positioning them favorably for US customers seeking domestic sourcing [2][3] 3. **Investor Sentiment**: The tariff exemption is expected to alleviate investor concerns regarding semiconductor tariff uncertainties, which have been a significant valuation overhang [2] 4. **TSMC's Market Performance**: TSMC's share price has increased by 15%, but it has underperformed compared to other AI-related companies, indicating investor concerns over geopolitical risks [3] 5. **Earnings Visibility**: The tariff exemption is anticipated to enhance TSMC's earnings visibility and reduce downside risks to its growth outlook, as management has already factored potential tariff impacts into their 2025 guidance [3] 6. **Mature Node Capacity**: The proposed tariff exemption may limit downside risks to TSMC's mature node capacity, potentially making its pricing more competitive [4][7] 7. **Vanguard and UMC Implications**: Vanguard may face negative implications due to lack of US exposure, while UMC's collaboration with Intel on a 12nm process lacks clarity on tariff exemption eligibility [8] Company-Specific Developments 1. **TSMC's US Investment**: TSMC plans to invest an additional US$100 billion in advanced semiconductor manufacturing in the US, bringing its total investment to US$165 billion, including multiple fabrication plants and R&D centers [9] 2. **GWC's Expansion**: GWC is expanding its capacity in the US, with significant customer interest in US-based products due to localization trends. Revenue is expected to ramp up gradually from 2H25 to 1H26 [10] Investment Thesis 1. **TSMC**: TSMC is viewed as a leading global foundry with over 60% market share, positioned to capture long-term growth opportunities in AI, 5G, HPC, and EV sectors. The stock is rated as a Buy with a target price of NT$1,370 [12][13][14] 2. **GWC**: GWC is rated Neutral due to slower end-demand recovery and high inventory levels among key customers, with a target price of NT$380 [16][19][18] Risks and Considerations 1. **TSMC Risks**: Key risks include deterioration in end-demand recovery, slower customer node migrations, and increased competition affecting profitability [15] 2. **GWC Risks**: Risks include fluctuations in end-demand recovery, competition, and production costs [20] Additional Insights - The tariff situation is expected to shift the cost dynamics in the semiconductor industry, potentially benefiting companies like TSMC that can offer competitive pricing while ensuring supply chain security [7]

Investment Rating - The report assigns an "Overweight" rating for the semiconductor industry, indicating a potential increase in stock prices relative to the CSI 300 index by more than 15% [4][13]. Core Insights - The U.S. AI Action Plan emphasizes accelerating AI innovation, building AI infrastructure, and leading in international AI diplomacy and security, which highlights the competitive strategy for AI development [2][4]. - The report identifies that the development of AI in China hinges on the construction of key AI infrastructure, particularly in semiconductor equipment and materials, which are crucial for self-sufficiency [2][4]. - The potential of AI is expected to trigger significant transformations across various sectors, including manufacturing, government, and scientific research, leading to new innovations and efficiencies [4]. Summary by Sections AI Development and Infrastructure - The U.S. government has launched the AI Action Plan, which includes three main pillars: accelerating AI innovation, building AI infrastructure, and leading in international AI diplomacy [4]. - The report suggests that the U.S. is in a race for global AI dominance, where the largest AI ecosystem will dictate global standards and reap economic and military benefits [4]. Semiconductor Industry Focus - The semiconductor manufacturing sector is highlighted as a critical area for AI development, with the report recommending investments in companies such as SMIC, North Huachuang, and others [4][5]. - The report stresses the importance of self-sufficiency in key equipment and materials for semiconductor production, especially in light of increasing U.S. export controls on semiconductor technology to China [4][5]. Investment Recommendations - The report lists several companies as recommended investment targets, including North Huachuang, Chipone, and others, all rated as "Overweight" [5]. - The projected earnings per share (EPS) for these companies show a positive trend, indicating potential growth in the coming years [5].

Summary of U.S. Semiconductors and Semiconductor Capital Equipment Conference Call Industry Overview - The focus of the conference call is on the U.S. semiconductor industry and the implications of Section 232 investigations initiated on April 1, 2025, which may impose tariffs on non-U.S. semiconductors and semiconductor capital equipment [1][11][29]. Key Points and Arguments 1. **Section 232 Investigation**: The ongoing investigation aims to assess the national security implications of semiconductor imports, with a report expected soon [1][11][30]. 2. **Tariff Mechanisms**: Potential tariff mechanisms could include component-level tariffs, which would incentivize the use of U.S.-manufactured semiconductors by rebating the value of U.S.-made components against tariffs on imported chips [3][55]. 3. **Impact of Tariffs**: Rough estimates suggest that tariffs could raise tens of billions of dollars, potentially increasing device costs by hundreds of dollars each [4][61]. 4. **Beneficiaries of Tariffs**: Companies with significant domestic manufacturing footprints, such as Texas Instruments (TXN) and Intel (INTC), are likely to benefit from these tariffs [4][62][63]. 5. **Current Semiconductor Imports**: The U.S. imported approximately $45 billion in semiconductors in 2024, primarily from Taiwan and Malaysia, but the majority of semiconductor content enters the U.S. through finished products [3][34][41]. 6. **Device Composition**: Many devices, such as smartphones and PCs, have high semiconductor content, which could make component-level tariffs more effective in reshoring semiconductor manufacturing [35][51]. 7. **Challenges in Implementation**: Implementing component-level tariffs poses logistical challenges, including defining the country of origin for semiconductors and tracking the supply chain of components [57][58]. Additional Important Content - **Historical Context**: Section 232 investigations have been used historically to protect national security, with a focus on various industries, including semiconductors [16][18]. - **Legal Framework**: The legal basis for tariffs is rooted in the U.S. Constitution and various acts that grant the President authority to impose tariffs under specific circumstances [12][23]. - **Investment Implications**: The call discusses the investment implications for various semiconductor companies, with ratings and target prices provided for companies like AMD, ADI, AVGO, INTC, NVDA, NXPI, QCOM, and TXN [5][6][9][10][62]. Conclusion - The U.S. semiconductor industry is at a critical juncture with the potential for significant tariff implementations that could reshape the competitive landscape. Companies with strong domestic manufacturing capabilities are likely to emerge as winners, while the overall impact on device costs and demand remains uncertain.

Core Viewpoint - Variability is a significant challenge in the semiconductor manufacturing industry, with random variability emerging as a critical issue affecting yield, reliability, and performance as device feature sizes shrink to atomic levels [1][26]. Group 1: Types of Random Effects - There are four types of random effects in semiconductor manufacturing: - Line Edge Roughness (LER) or Line Width Roughness (LWR) affects gate leakage current, wire resistance, chip power consumption, and reliability [6]. - Local Critical Dimension Uniformity (LCDU) leads to variations in critical dimensions among adjacent devices, impacting yield and chip speed [7]. - Local Edge Placement Error (EPE) can cause short circuits or open circuits, affecting yield and reliability [8]. - Random Defects such as bridging or breakage of chip features can also impact yield and reliability [11]. Group 2: Increasing Severity of Randomness - Random variability has become more severe in the latest process nodes, with local random variability now potentially accounting for over 50% of certain manufacturing errors [3][26]. - The introduction of EUV (Extreme Ultraviolet) lithography has exacerbated the issue, as the photon count for exposure is significantly lower compared to older technologies, leading to substantial differences in adjacent feature sizes [21][22]. Group 3: Measurement and Control of Randomness - Accurate measurement of random effects is crucial for optimization and control in semiconductor manufacturing, as traditional measurement tools may introduce significant errors [24]. - The industry requires specialized measurement and analysis techniques to accurately report random errors and must adopt probabilistic methods for analysis, moving away from deterministic approaches [25]. - Effective control of randomness can improve both yield and productivity, but it requires precise measurement technologies [28][29].

Core Viewpoint - A California-based company has abandoned a $55 billion semiconductor project in Genesee County due to significant uncertainties at the federal level, as stated by Michigan Governor Whitmer [3][4]. Group 1: Project Abandonment - The company originally planned to build a semiconductor factory in Monty Township but decided against constructing it anywhere in the U.S. due to economic turmoil and tariff threats [3]. - State Senator John Cherry expressed disappointment, highlighting the project as a once-in-a-lifetime opportunity for Genesee County to regain its manufacturing strength [4]. Group 2: Political Reactions - Cherry criticized the Trump administration's tariff policies as a driving factor behind the decision, claiming they disrupted supply chains and created instability for investors [4]. - Michigan House Speaker Matt Hall argued that the tariffs were intended to penalize companies outsourcing jobs and that Trump's leadership made job creation in the U.S. more attractive [4]. Group 3: Economic Impact - A model from the Wharton School predicted that Trump's tariffs could lead to a 6% long-term decline in U.S. GDP and a 5% decrease in wages, costing a middle-income family $22,000 over their lifetime [4]. - U.S. Representative Kristina McDonald-Rivett criticized the abandonment of the project, stating it would have created thousands of high-paying jobs and significantly impacted the local economy [5]. Group 4: Future Prospects - Despite the setback, local economic development leaders remain committed to attracting advanced manufacturers to Genesee County, believing it to be a prime location for advanced manufacturing [6]. - Governor Whitmer aims to establish a semiconductor factory by the end of 2026 and continues to compete for advanced manufacturing investments in Michigan [7]. - The Michigan Economic Development Corporation's CEO expressed confidence in the state's ability to attract significant investments despite external economic factors [7].

Core Viewpoint - Taiwan Semiconductor Manufacturing Company (TSMC) has recently joined the trillion-dollar club, highlighting its significant growth and market leadership in the semiconductor industry Group 1: Market Position and Leadership - TSMC holds approximately 70% market share in the semiconductor foundry market, far surpassing its closest competitors, with no foreseeable path for rivals to catch up [3] - The company is a critical supplier for major tech firms, including Apple, Nvidia, Tesla, and AMD, indicating its integral role in the tech ecosystem [4] Group 2: Financial Performance - In Q1, TSMC reported revenue of $25.5 billion, reflecting a 35% year-over-year increase, with net income rising 60% year-over-year in local currency, showcasing strong financial health [5] - TSMC's customers typically engage in long-term contracts, contributing to predictable revenue streams [7] Group 3: Growth Drivers - Demand for AI chips is surging, with management estimating a compound annual growth rate (CAGR) in the mid-40% range for AI accelerator revenue until 2029 [8] - TSMC is expanding its operations internationally, establishing manufacturing plants in the U.S., Germany, and Japan to mitigate geopolitical risks associated with Taiwan [10] Group 4: Competitive Advantages - The semiconductor industry has high barriers to entry, requiring significant capital investment and advanced technology, which keeps competitors at bay [9] - TSMC has a monopoly on the production of the most advanced semiconductors, with smaller manufacturing nodes (e.g., 7nm, 5nm, 3nm, and upcoming 2nm) that enhance performance [14] Group 5: Investment and Future Outlook - TSMC is committed to growth, with capital expenditures expected to rise from over $30 billion in 2024 to between $38 billion and $42 billion in the current year, aligning with increasing demand for AI chips [15][17] - The company has demonstrated resilience since its inception in 1987, successfully navigating economic cycles and technological changes, positioning itself for long-term growth [18]

Company Performance - TSMC's stock closed at $229.17, reflecting a -2.4% change from the previous day's closing price, underperforming compared to the S&P 500, which lost 0.79% [1] - Over the past month, TSMC shares have gained 14.44%, outperforming the Computer and Technology sector's gain of 7.88% and the S&P 500's gain of 5.22% [1] Earnings Projections - TSMC's projected earnings per share (EPS) for the upcoming earnings disclosure is $2.32, indicating a 56.76% increase from the same quarter last year [2] - The consensus estimate for TSMC's revenue is $30.05 billion, reflecting a 44.32% increase from the same quarter last year [2] - For the full year, earnings are projected at $9.28 per share and revenue at $116.93 billion, showing increases of +31.82% and +29.8% respectively from the previous year [3] Analyst Estimates and Rankings - Recent modifications to analyst estimates for TSMC indicate positive sentiment regarding the company's business operations and profit generation capabilities [4] - The Zacks Rank system, which considers estimate changes, currently ranks TSMC as 2 (Buy), with a historical average annual return of +25% for stocks rated 1 since 1988 [6] Valuation Metrics - TSMC is trading at a Forward P/E ratio of 25.31, which aligns with the industry's Forward P/E of 25.31 [7] - The PEG ratio for TSMC is 1.22, matching the average PEG ratio of the Semiconductor - Circuit Foundry industry [7] Industry Context - The Semiconductor - Circuit Foundry industry is part of the Computer and Technology sector and holds a Zacks Industry Rank of 2, placing it in the top 1% of over 250 industries [8] - Research indicates that the top 50% rated industries outperform the bottom half by a factor of 2 to 1 [8]