Semiconductor Return on Investments

The New York Times recently reported the grant of $1.5 billion to chipmaker GlobalFoundries by the US government. This grant is intended to increase the supply of legacy computer chips made in the USA. Such chips are critical for both the US auto and defense industries. The investment by the US government in this industry makes sense from the viewpoints of national defense as well as technical and economic competitiveness. How about semiconductor return on investments for the private investor? In this regard we took a look at GlobalFoundries, Nvidia, Taiwan Semiconductor, and Intel.

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History of Investing in Semiconductor Companies

Getting in on the ground floor when companies like Intel started making computer chips was very profitable. It could be compared to investing in General Motors when it became available by a public offering in 1916.One share of today’s Intel stock was worth $0.76 when first available in 1984. Its top price in 2000 was $73.19 and it traded for $12 at the depth of the Financial Crisis. The stock peaked again at $64 in 2021 before falling to $26 at the end of 2022. It rose to $50 at the end of 2023. The stock trades today at $43 and has a 1.15% dividend yield. A basic problem with semiconductor stocks in general is that the industry is prone to boom and bust cycles. A problem in regard to individual semiconductor stocks is that the technology keeps advancing and those who do not keep up see their profits plummet as their chips become obsolete. On the other hand, a company like Nvidia is at the right place at the right time with chips that dominate the AI world and went up six-fold in 14 months.

Semiconductor Return on Investments

Nvidia Success Story

A share of today’s Nvidia stock sold for $0.82 when it went public in 1999. Nvidia is best known for making the GeForce graphics processing units that are the backbone of PC gaming, 3D rendering, and video editing. The stock had risen to the $7 range by 2016 before peaking at $75 in 2018 and then $315 in November of 2021. It fell with the overall market as the Fed began raising interest rates and bottomed out at $121 October 2022. That was when its dominance in emerging artificial intelligence applications paid off and it went to $726 by the middle of February 2024. Rather than choosing to make general purpose chips, the three founders of Nvidia choose to make chips for the video game market. They did this because of the potentially huge market and the unique challenges of that were not answered by general purpose computing. Thus they established an extremely high tech niche that serves as a defensive moat keeping competitors out. They have followed the same track producing specialty chips in a high cost of entry business. The same strategy appears to be the case with chips for AI and is paying off handsomely.

Taiwan Semiconductor’s Rise to Semiconductor Dominance

Taiwan Semiconductor was founded in 1987. It was the first dedicated semiconductor foundry. That is, they make chips designed by others. Today those others include Broadcom, Nvidia, MediaTek, Apple, Qualcomm, ARM, UNISOC, AMD, Marvell, HiSilicon, and Spectra7. The company has had a compounded annual growth rate of 17.4% over its entire history. A share of today’s stock first sold for $6.50 in US markets and today sells for $126.99. By working with numerous companies, Taiwan Semiconductor has been able to avoid much of the ups and downs that plague the semiconductor industry.

Investing in GlobalFoundries

The US investment in GlobalFoundries has to do with national defense and overall technical and economic strategy. How good of an investment is GlobalFoundries for the average investor? Their story starts in 2008 when Advanced Micro Devices decided to spit off their chip fabrication operations and only do design. The resulting company went private and only became a public company in October of 2021 with the stock selling for $48.74. Since then GFS has cycled up and down about every two months. Its high was $78,94 and its low was $38.81 over the last twenty-eight months. Today the stock sells for $53.38, has a 29.1 PE ratio and does not pay a dividend.

How Should You Invest in Semiconductor Companies?

The world is increasingly reliant on the little semiconductor chips that run computers, smartphones, and the world of smart appliances. This niche is not going away and can only grow. In addition, this is a high cost of entry business. Intel is investing $20 billion for one fabrication site in Ohio and plans to invest $80 billion more for four more facilities over the years. Taiwan Semiconductor is spending a similar amount of money for their first fabrication facilities in the USA. Even these tech giants have needed assistance from the US government via the Chips Act to follow through with these investments.

If you have a crystal ball you can predict the next stock surge with a company like Nvidia. A safer approach is to look for long term gains with companies like Taiwan Semiconductor, Nvidia, Intel, or GlobalFoundries, use a dollar cost averaging approach, and be able to sleep at night.

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