Wall Street Breakfast: Silicon Volley

Silicon Volley

A war over silicon is brewing between the world’s two largest economies as the U.S. looks to isolate China from one of the most important technologies of the future. This past summer saw the passing of the CHIPS ACT, which allowed the federal government to pour billions of dollars into the semiconductor sector to “lead the world in future industries and protect national security.” The Biden administration followed up on the measures with serious export controls to prevent U.S. firms – or any global company that uses their tech – from selling chip designs, software and equipment to Beijing (it also prohibited American nationals from working with Chinese chip companies to slow their technological advances).

Backdrop: Chips are used in just about everything today, making the modern economy possible, but the bigger concerns here are those used in sensitive military technologies. The most advanced integrated circuits let nations stay far ahead of their rivals in terms of weapons systems and intelligence gathering, and more broadly, are a statement of geopolitical power. As China grows its influence, the country has been making strides towards producing its own advanced chips, and has even surprised the U.S. with its latest military developments (remember the Chinese hypersonic missile test that went around the world in 2021?).

Until now, the U.S. has outsourced the manufacturing of its most advanced chips to Taiwan, which has become increasingly threatened by its forceful neighbor China. Taiwan Semiconductor Manufacturing Company (NYSE:TSM) and other local fabs account for 92% of the world’s advanced semiconductor production, according to the Semiconductor Industry Association, and former House Speaker Nancy Pelosi even saw it necessary to meet with TSMC executives directly during a tension-filled visit to the island last summer. The move highlighted the significance of the company to American security, and its shares are up nearly 10% since the visit. Steve Cress, Head of Quantitative Strategies at Seeking Alpha, recently identified TSMC as one of the top 10 tech stocks for 2023 (see the others here).

Go deeper: The U.S. is now trying to protect the rest of the advanced chip supply chain by forging an alliance that will curtail China’s ability to produce its own domestic silicon. Talks are set to conclude today with Japan, the biggest supplier of chip wafer, metals and chemicals, as well as the Netherlands, known for its deep ultraviolet lithography machines used to carve advanced chips. Restrictions are likely to be imposed on ASML (NASDAQ:ASML), Nikon (OTCPK:NINOY) and Tokyo Electron (OTCPK:TOELY), building on earlier business rules and trading regulations, and marking the latest salvo in the semiconductor war. (23 comments)

Weak guidance

Speaking of chips, Intel (INTC) is out with one of the worst quarterly outlooks in its history, with a forecast that missed estimates by billions of dollars. “Persistent macro headwinds will continue in the near term,” CEO Pat Gelsinger said on the earnings call as the stock slumped 9%, and outlined that Intel would continue to “prioritize investments critical to our transformation” (how’s the $20B fab going in Ohio?). The dividend may be in danger, warns SA Marketplace Jonathan Weber, adding that profitability remains under pressure and Intel continues to lose market share in important areas such as data centers. (285 comments)

More data

The initial estimate of Q4 GDP arrived yesterday, showing the economy expanded at a 2.9% annualized rate, compared to forecasts of 2.6%. The Fed is likely to mark that data as “resilient” – despite a deceleration from Q3 – giving policymakers room to start the year with a couple more rate hikes. At the same time, durable goods orders for December came in at 5.6%, above the expected 2.5% level, while weekly initial jobless claims hit a 9-month low with claims falling 6K to 186K. The major stock averages rallied on the news, while December new home sales topped estimates and added to the upbeat sentiment. (236 comments)

Lots of buzz

Already sharply higher from a report that Meta (META) would pay it millions to boost creator content, BuzzFeed (BZFD) surged more than 120% on Thursday (and shares are up another 20% premarket). A second report stated that the viral media company will use ChatGPT creator OpenAI to help build some content, such as quizzes and personalizing material, though it will remain focused on human-generated journalism in the newsroom. It comes after digital publisher CNET paused a recent test using internal AI tech to create “explainer” stories about financial services after finding factual errors. (3 comments)

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