Editor’s Note: This month our Spotlight is focused on Dave Lashmet, the man Porter calls “the best technology investor of the last 25 years.”
In last week’s issue (click here if you missed it), we explored the next phase of the GLP-1 weight- loss revolution and showed you how to profit from one of the most important drug discoveries ever.
Porter also detailed how Dave has consistently helped his readers get in on some of the world’s best-performing companies and most important technologies, usually years before the mainstream financial press catches wind of them.
This week’s Spotlight, however, doesn’t focus on an emerging new technology or a breakthrough discovery. Instead it involves one of the world’s most well-known companies that, as Dave says, “the market thinks is obsolete.”
But as you’ll see, while Wall Street writes this company off, Dave sees a sleeping giant that’s preparing to bounce back… and that offers a hedge against one of the stock market’s greatest risks.
You’ll find Dave Lashmet’s full analysis below – which he originally published in May 2023.
If you ask Warren Buffett – the greatest investor in three generations – understanding risk is simple… Risk is loss.
Normally, this rule is subtle.
Risk can mean many things, after all. But not this time.
You see, Buffett dumped 52 million shares of one company by the end of 2022 – cutting his stake by 85%. He sold just months after buying in. We suspect the last 15% will follow.
Here’s why…
Buffett took a $5 billion stake in Taiwan Semiconductor Manufacturing (TSM) as of the third quarter of 2022 .
Technically, he bought the American depositary receipts (“ADR “), and the bank bought these shares in Taiwan.
The issue is, if there’s no Taiwan – and, thus, no Taiwan Stock Exchange – the ADRs are worthless.
You could wake up one morning and the shares have zeroed. It’s the truest and swiftest expression of “risk is loss.” And it would be a loss that no one could tolerate.
There are lots of reasons Taiwan or its market could fail overnight – but they all hinge on China.
China is intent on recapturing Taiwan… And it has built a navy and an air force to make it happen.
Economists normally shun this dose of reality. It’s not proper economics, after all – it’s mindless war. It flies in the face of dispassionate analysis… or seeing humans as rational actors.
Buffett recently cut right through these pretensions. Last month, he made his stance clear in an interview in Japan…
Japanese reporter: You dramatically reduced your holding of Taiwan Semiconductor Manufacturing Co. just after making an investment. Why? Is it due to the geopolitical tensions?
Warren Buffett: That is certainly a consideration.
But Taiwan Semiconductor is the greatest business in the field by a huge margin. The management is good. But is there a difference between that being located in Omaha, Nebraska, and in Taiwan? Yes.
Put another, darker way:
Taiwan Semiconductor is at ground zero for the next war.
This isn’t just a danger to one company. It’s a problem for the broad market – across the global economy and spanning all kinds of industries.
Fortunately, we can hedge against that outcome. But to see the opportunity, you first need to know the threat. Let us explain…
The World Needs a Backup Plan
for Taiwan’s “Silicon Shield”
Taiwan likes to call its chipmaking plants a “silicon shield” that will protect against any invasion.
I’m not sure I believe this. It’s like saying “only business matters” when you’re surrounded by jets, ships, and submarines. It’s willful blindness to China’s intentions.
Warren Buffett won’t fall for that any longer. And as of May 1, 2023, the U.S. won’t accept it, either. That’s because China just started a draft to conscript engineers…
See, modern weaponry is complex. It’s not a bayonet. It’s a cyber-warfare kit.
And the hard truth is this… You don’t pull talent from universities in peacetime.
On May 1, China made changes to its military-service law. One of its big focuses is to draft more science and engineering students. The Chinese government wants soldiers who can take on satellites, drones, and cyber campaigns.
Its military is also researching “intelligence warfare,” focusing on artificial intelligence (“AI”) and other technologies.
China is building out its army, too. It’s making sure its land, sea, and air forces are complete. Potentially, that’s an invasion force to occupy Taiwan.
While none of us wants war, it’s coming…
Of course, we don’t know when war is coming. More than likely, it will be after the Russia-Ukraine war ends.
You see, Russia has repeatedly threatened to use nuclear weapons to maintain its gains in its land war. This has had a chilling effect on China’s plans. As China has affirmed more than once, it abhors nuclear war – the war no one can ever win.
The reasons for that are not moral, but practical…
China wants nukes to be an impossible choice. If Russia uses them, then the impossible becomes possible. Suddenly, other nations could see nuclear retaliation as a viable option. It’s a threat China doesn’t want to face.
In a way, that’s the same “risk is loss” equation that Warren Buffett weighs: where the possibility of total loss is too much to bear.
Once the war in Ukraine ends, though, the risk of nuclear war falls with it, to a presumably tolerable level. That’s when we’ll want our hedge in place… before China makes a move.
In China’s eyes, the threat is not from Taiwan, but from British, French, and U.S. ships that defend Taiwan. So for now, China will bide its time. These nations stand ready to protect an independent democracy of 24 million people.
Importantly, though, war is not the only contingency. The U.S. has economic interests to protect…
Taiwan is a major trading partner to the U.S., Canada, Europe, Japan, and South Korea. Roughly 80% of the world’s smartphone chips, 50% of high-end logic chips, and 20% of memory comes from Taiwan.
Without exaggeration, these chips are the lifeblood of our modern technological and medical economy.
Taiwan Semiconductor makes most of these chips. But the country is home to other smaller chipmakers and electronics firms. If anything happens to the flow of water and electricity in Taiwan – say, in the case of an invasion – global chipmaking will stop.
The U.S. Director of National Intelligence Avril Haines summed up the potential economic cost this way …
As she testified to the U.S. Senate, a Chinese invasion of Taiwan would lead to annual losses of $1 trillion.
And the effects could be worse than that. New smartphone production is a $1 trillion business annually. Buying minutes – another part of the smartphone business – is worth another $1 trillion on top of that.
In other words, we have a global dependency on one small country… one that China is preparing to seize. And we have a short window of time to prepare for the fallout.
The U.S. CHIPS and Science Act of 2022 and parallel efforts in Europe and Japan are trying to break this chip dependency. Unfortunately, it could take a decade or more to replace Taiwan’s chipmaking capacity with production in other parts of the world.
That’s why Buffett rolled back out of his $5 billion stake in Taiwan Semiconductor.
Instead, this investment legend is looking for safer locations to invest. And so are we, much closer to home…
Our New Hedge Against a Taiwan Invasion
A lot of folks will tell you that global chipmaker Intel (Nasdaq: INTC) is obsolete. The market hates it… And it’s losing money, at least for now.
So Intel, at a glance, looks like a disaster – that is, for backward-looking investors. That perception is why Buffett bought shares of Taiwan Semiconductor originally.
But no one can invest in the past. You can only invest for what’s going to happen next.
That’s why we like Intel.
See, Intel’s best chips today have 7-nanometer (“nm”) transistors. That’s great – until it faces the competition. Samsung can make an even smaller transistor, at 5 nm. That’s 50% smaller, in two dimensions.
Even more, Taiwan Semiconductor is already at 4 nm and falling. This means Intel’s chips are both physically bigger and more power-intensive… with more heat waste versus its rivals.
But neither Samsung nor anyone in Taiwan invents the tools to make chips. And that’s where Intel is about to catch up.
For the most part, chip-manufacturing tools come from the U.S. (via companies like Lam Research and Applied Materials). One major supplier, ASML, is headquartered in the Netherlands.
The cutting-edge technology here is “extreme ultraviolet” chipmaking: a $100 million tool from ASML. But Intel was late to adopt this. It tried a different path… and failed.
Now, Intel’s new CEO has adopted ASML’s tools. And Intel’s first 4 nm chip is set to come out later this year. It’s already ramping up to full-scale production.
We don’t doubt this, as we know the tools Intel uses and when they were installed. Namely, Intel installed one of these $100 million ASML machines as an extension to its fabrication plant (“fab”) in Portland, Oregon.
Thanks to this change, there is no enduring technological advantage for Taiwan Semiconductor or Samsung’s chips over Intel’s…
By 2025, Intel hopes to hit 1.8 nm to produce smartphone chips. There’s more risk for Intel to hit 3 nm in 2024 or 2 nm in 2025. But it’s all the same kit.
Currently, these chips are largely made in Taiwan, with the rest made in South Korea by Samsung. So without Taiwan’s manufacturing, smartphones stop… and so will production of half of all server chips, AI chips, and logic chips.
Only Samsung and Intel can make up this deficit – and Samsung is focused on memory more than logic.
Indeed, Samsung plans to ask the U.S. Department of Commerce for help with a $17 billion memory fab in Texas. Meanwhile, Intel is asking the department to support its two new $10 billion fabs outside Columbus, Ohio.
Both companies are trying to “re-shore” chipmaking into the U.S… that is to say, out of Taiwan.
Even Taiwan Semiconductor is trying to get out of Taiwan. It wants to build a giant new fab in Phoenix, Arizona, to support Apple (AAPL). Apple, of course, is a $2.75 trillion company… So if Apple needs chips, a chipmaker starts building.
This is where we have to consider some specific outcomes – to see which potential hedge has a future advantage…
You see, few other firms have Apple’s power over third-party chipmakers. Only Google’s parent company Alphabet (GOOGL) can compete with Apple. Samsung is also an exception, since Samsung makes smartphones and owns its own chipmaking fabs.
All this means, if (or when) a war starts in Taiwan, Samsung chips and phones will survive it. We expect Apple and Google will also be able to make phones, using Samsung’s chip-foundry services.
But when it comes to laptops, personal computers, and cloud servers – only Intel and Taiwan Semiconductor make chips for these devices.
Taiwan Semiconductor doesn’t brand these chips. Nor does it design them. They are designed by Advanced Micro Devices (AMD) and by Nvidia (NVDA).
Alas, neither AMD nor Nvidia can afford to compete against Apple or Google to access Samsung’s fabs. If production stops at Taiwanese Semiconductor, AMD and Nvidia are in huge trouble.
This will give Intel a monopoly on cloud-server chips, PC chips, and laptop chips – even at 7-nm sizes.
Even better, by the end of 2023, Intel will be at 4 nm, and by 2024 it’ll be at 3 nm – nearly state of the art, and far from “obsolete.”
Not only will Intel’s technology be able to compete handily… but it could also be the only game in town. No other chips might be available. So Intel will be able to set the price.
In turn, instead of getting wiped out by a sudden collapse of Taiwan’s stock exchange, shareholders could see up to 400% gains in Intel’s share price.
Finally, even if China decides to not invade Taiwan – so a hedge never matters, and we merely own Intel shares – we’re still buying a rebounding giant, with huge chip fabs in Ireland, Phoenix, and Portland.
The CHIPS Act should also help Intel set up a fourth chip complex in Ohio – with a fifth planned for Germany.
In short, Intel will quickly catch up to its rivals – even without China starting a war to conquer Taiwan. And we have one more potential kicker to consider…
Intel’s Acquisition Bid Could
Expand Production Dramatically
On top of everything else, Intel is closing in on an acquisition of Tower Semiconductor (TSEM).
This $5.4 billion deal would give Intel another 2 million wafer starts per year. (A standard wafer is a disc of pure silicon the size of a 45 revolutions per minute vinyl record… though some are as big as an LP.
Chipmakers count wafers instead of single chips to standardize throughput, no matter the chip you build.)
That added production would come from seven additional fabs. Tower’s fabs are in the U.S., Italy, Israel, and Japan… but, importantly, not in Taiwan.
Intel is buying Tower not just for these strategic locations, though, or even for the fabs – but rather for the customers.
You see, Tower is a contract chip manufacturer. It makes sensor chips, mostly. Designers – like Analog Devices (Nasdaq: ADI), for example – farm this manufacturing work out to others.
So by adding Tower, Intel can eventually convert its new logic fabs into sensor fabs as the facilities age. This will put Intel on the same “chips for hire” business that Taiwan Semiconductor and Samsung currently run.
It also means that instead of getting five to seven years per plant, Intel can double or triple its plants’ useful life. Granted, less-elite chips (like sensors) get lower margins – but if the fab is already fully depreciated, it’s worth it.
This is Intel’s plan. Tower shareholders are also on board with the acquisition. There’s just one last obstacle… China is holding back approval. So the deal hasn’t yet closed.
Nvidia found itself in this dilemma when it set out to buy Mellanox. China eventually approved that deal – but if it hadn’t, Nvidia planned to reject China’s objection. We expect Intel will take this same position. China holding back a hedge against itself is ridiculous, at least if it wants less global opposition to an invasion of Taiwan.
Ultimately, however, that’s why a narrow economic view fails. China is more than an economy with rational goals… It’s a strategic rival.
Warren Buffett sees it… We see it… And we also see a safe haven for investors outside of Taiwan.
That’s why we are adding Intel to the model portfolio – both as a hedge and as a rebounding tech company in its own right.
Remember: Hedges only work if you put them in place. This is not something you can do after the fact. We want to get in now, before war eventually breaks out.
Editor’s Note: While Intel’s acquisition of Tower Semiconductor did not happen, the analysis remains the same.
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Editor’s Note: Porter and Dave recently sat down to discuss one of the market’s biggest opportunities: the next phase of the GLP-1 weight-loss revolution and the companies best positioned to profit from this trend.
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