$84 billion!
Remember that number, because that is but one contributor to the supply shortages that are emerging everywhere.
As Ted outlined here, economic and fiscal policies that emerged from the Great Recession disincentivized investments across a number of industries. That means there isn’t enough production capacity to meet demand for many critical components.
You’ve probably heard about the lack of lumber. You’ve likely even felt the pain of those soaring prices. But the most important shortage by far is taking place in semiconductors. It’s impacting smartphones, vehicles, appliances and even dog toys.
Here’s why chip supply chains are such a mess.
Why We’re Short on Chips
Back to that $84 billion figure.
That’s how much Intel (Nasdaq: INTC) has spent on share buybacks over the past decade, instead of investing those funds in research and manufacturing capacity to meet unprecedented demand for semiconductors.
It’s just one of the reasons we face limited supply capacity.
Making semiconductors is hard and expensive. It costs anywhere from $5 billion to $10 billion or more to build a new foundry to turn out chips. It takes even more to stay on the leading edge, which is why just one company dominates the market for the most advanced chips, with over 80% market share.
But even basic chips are in short supply, and that has more to do with the surprisingly strong demand. The unexpected strength in the post-pandemic economy left companies across industries such as automotive and appliances struggling to secure supplies.
There are also secular reasons that will make the shortage even worse. With advances in technology, devices need even more chip content to function.
5G smartphones will have nearly 40% more chips than the prior generation.
Electronic content will make up 50% of a car’s cost by 2030 compared to just 35% in 2010, as you can see below.
(Click here to view larger image.)
That’s just a couple examples among many.
And that means the chip shortage is here to stay.
But in all the mess, there is a profit opportunity lurking. And it may surprise you.
Why Intel Is Key to Solving the Chip Shortage
I originally recommended Intel back in July 2020. My argument at the time focused on America’s need to reclaim tech supremacy and secure domestic production. Soon after, the company revealed its lag in catching up with the latest technology … no doubt a result of years neglecting research and development.
But with 16% market share, Intel is still the global leader and America’s chip champion by far. And now the company has a new CEO, Pat Gelsinger, and he’s sounding off on the company’s plan to steer funds away from share buybacks and toward adding chip capacity.
The company is plowing $20 billion into advanced chip production, and making investments to alleviate the auto shortage.
Just as Ted pointed out that Federal Reserve Chair Jerome Powell gets it on inflation, Intel’s new CEO understands that $84 billion blown on share buybacks has left the company in a poor position.
Intel’s new investments are just the first steps to put the company back on the path to leadership. But it has the resources and technical skills to take advantage of the chip shortage.
That’s why Intel’s stock is the overlooked play to profit.
Best regards,
Clint Lee
Research Analyst, The Bauman Letter
