It’s a tough environment for semiconductor stocks.
We already knew that last month the US began restricting exports of high-end GPUs to Russia, Hong Kong and mainland China. The Biden administration had sent letters to Nvidia ( NVDA ) demanding permission to sell its A100 and H100 chips designed to accelerate machine learning and artificial intelligence in those three regions. Nvidia said at the time that the restriction likely put at risk… for the company, as much as $400 million in annual revenue.
Advanced Micro Devices (AMD) was similarly informed that a similar restriction would be placed on that company’s MI250 chips. AMD did not consider its M100 chips to be part of the new license requirement, and that if they were, the new rules would not have a material impact on the company.
Monday morning we learned that the Biden administration is likely to intensify and expand those restrictions. The Commerce Department is expected to release new guidelines that will be generated by letters sent to Applied Materials ( AMAT ) and former Sarge faves Lam Research ( LRCX ) and KLA Corp . (KLAC).
Restrictions would be placed on equipment that could be sold to China in order to protect US national security and foreign policy interests. This means trying to eliminate US-based technology from contributing to improving or strengthening Chinese military capabilities.
This news comes on top of the Chip and Science Act, which was passed this summer to increase US semiconductor independence and create a more competitive environment for US chip makers (foundries). What the act does for US chip designers is less clear.
Dealing with everything
Trading in this group started to feel a little grim much earlier this year. I had first exited my position in Nvidia, as this stock, long before the company even warned, was priced into perfection. Once it became known that the cryptocurrency business would likely dry up due to the changes made to Ethereum and then these markets collapsed, it didn’t take much to trigger that trigger. Some of the other names that were/were Sarge’s favorites were more difficult projects.
I have long felt the need to invest in the data center, 5G expansion and artificial intelligence. Advanced Micro Devices and Marvell Technology ( MRVL ) cover those bases, although in self-defense, I had to cut those positions as well, despite both of those stocks trading at about half of NVDA’s current valuation in terms of future profits multiplied. I leave about 25% of my long AMD in place and about 50% of my MRVL. Really, this was based on the need to raise cash in an uncertain period. The moves served to protect at a time when my portfolio needed protection.
Maybe it’s time to come back, or at least increase exposure to the group?
The team is starting to turn for the better. The Philadelphia Semiconductor Index is still down 31% year-to-date. Nvidia falls 51%, AMD 41% and MRVL 43%. I think maybe MRVL is in the best position of the three in the short term, but I’ll never give up on AMD’s Lisa Su.
So I’ll be on those two names going forward. But NVDA? Still too expensive, in my opinion. Replacing NVDA with Intel (INTC) in my portfolio?
Intel, once a tech titan, has become a laughingstock. Last quarter, Intel reported a GAAP loss, adjusted earnings down 79% and revenue down 22%. Say one thing about CEO Pat Gelsinger, he sure hasn’t fixed Intel. If anything, the company’s decline has only accelerated as AMD has eaten Intel’s lunch in many areas where they compete head-to-head.
However, Intel is making strides and spending money to become a chip foundry, perhaps America’s foundry. That’s where the government’s money goes. That’s why Taiwan Semiconductor (TSM) manufactures here. That’s why GlobalFoundries (GFS) is trading closer to the top of its chart than the bottom.
So really… I think I want to add either GFS or INTC just because how can INTC really be that bad and stay that bad? GFS trades at 21 times forward earnings and does not pay a dividend. INTC trades at 13x and yields 4.6%. Both have solid balance sheets. Intel trades at less than twice tangible book. GFS trades at nearly four times tangible.
I really can’t believe I’m going to do this… but I think it’s time to get involved in INTC for the first time in a long time, based on the valuation and the fact that they’re going to be in the government sweet spot.
(AMD and AMAT are holdings in Action Alerts PLUS Members Club. Want to be notified before AAP buys or sells these shares? Learn more now.)
Get an email alert every time I write a real money article. Click “+Follow” next to my byline in this article.