Comments on the CHIPS and Science Act

08/11/22 | Birchbrook Team | Boughs & Branches

On August 9, 2022, President Biden signed the $280 billion CHIPS and Science Act into law. The legislation aims to significantly boost domestic semiconductor production over the coming decade by providing nearly $53 billion in subsidies to chip manufacturers that either establish or expand operations in the United States. In addition, such companies can qualify for a four-year 25% investment tax credit. Tens of billions have also been earmarked for various educational and research programs in the areas of STEM, artificial intelligence, quantum computing, and 6G wireless technology.

The act is the product of months of negotiations during a period of significant semiconductor supply constraints. Limited chip supply has helped fuel inflation, particularly in automobiles and electronic devices. The pandemic laid bare the need for the United States to improve its domestic chip production to better compete with, and to lessen its reliance upon, countries like China.

The CHIPS and Science Act further reinforces our already positive long-term outlook for semiconductor stocks. Semiconductors will be of significant importance in the years and decades ahead, as products become increasingly digitized and connected. Already, chips can be found in mundane devices such as lightbulbs and toasters, and they are integral to the inner workings of modern cars. It isn’t hard to envision a future where most consumer products rely on chips as the Internet of Things (IoT) continues to evolve. In addition, microprocessors power much of the modern world, and the need for processing power is only going to accelerate as the internet expands in scope and speed, as businesses continue to grow and innovate, and as new technologies like machine learning and the blockchain mature.

A number of our individual stock holdings stand to benefit from these long-term trends, and the CHIPS and Science Act is likely to accelerate this dynamic. In particular, companies like Advanced Micro Devices (AMD) and Micron Technology should benefit, the former being a major supplier of graphical processing units (GPUs) and datacenter chips, and the latter being a leader in DRAM and NAND memory. For clients invested primarily in mutual funds, a number of the funds we use also have exposure to semiconductor stocks.

Despite the bright long-term outlook, there is downside risk that is likely to lead to continued volatility in the short term. A weakening economy has the potential to weigh on chip manufacturers, as immediate demand for personal computers and other devices could slow. In addition, one should not expect immediate results from the CHIP and Science Act, as it will take years for its effects to be felt. Lastly, if China were to attempt to take over Taiwan by force, this would have severe short-term consequences not only for semiconductor companies but for the global economy at large. Taiwan is home to much of the world’s semiconductor production, particularly high-end production.

Nonetheless, because chips will be so central to our technological future, we believe it is important to maintain a core allocation to semiconductor stocks over the coming years and view pullbacks as buying opportunities.

As always, call or email if you would like to discuss this topic further.