Markets

The Main Event: Make Manufacturing Great Again

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What happened

The 20th century political landscape was dominated by the handful of countries that controlled oil. But could we be seeing a change of the guard today to a new flashpoint?

Last week, Washington introduced legislation to strengthen defense ties with Taiwan, mere weeks after passing the U.S. Innovation and Competition Act, or as CNN calls it “the China Competitiveness Bill.” (At the heart of the bill is a critical link to the global economy.)

Taiwan is increasingly a flashpoint, with mainland China claiming rule under its “One China” policy while Taiwan’s elected representatives claim they are a sovereign state. 

The World’s Chipmaker

We’re not geopolitical strategists here at Millennial Money, but this dispute is too important to ignore. 

Why? Because the heart (actually, the brains) of the entire technology industry runs through Taiwan. 

Its largest company, Taiwan Semiconductor Manufacturing, is quietly the world’s tenth largest (worth $605 billion, or nearly 3X Intel!). In total, the island is the world’s largest chipmaker.  

Crazy Stat: 60% of all foundry (chip manufacturing) revenue was booked in Taiwan.

China understands Taiwan’s strategic global importance and wants to assert more control over the island like it recently did to Hong Kong.  

So it’s understandable why Big Tech CEOs are following developments so closely! 

As a result, tensions are on the rise, with the United States and Japan going as far as to conduct joint military exercises to defend Taiwan from China. 

Any escalation could decrease chip availability in the short run (remember the auto industry?) but the future of the global economy might be affected by what happens in Taiwan. 

Tech manufacturing is key to China’s “Made in China 2025” policy. China aims to be the world’s dominant economy by leading in key future industries like advanced robotics, AI, and electric vehicles. State control over the world’s largest foundry furthers that goal. 

Bottom line

English Prime Minister Winston Churchill once quipped, “You can count on Americans to do the right thing… after they’ve tried everything else.” 

After decades of outsourcing, America gave China a clear manufacturing lead. China’s ambitions are forcing lawmakers and corporate leaders to reevaluate our manufacturing strategies with a focus on next-gen technology.

Many investors overlook semiconductor manufacturing. It’s complicated! Reading about how to manufacture semiconductors isn’t exactly bedtime reading! 

Yet, the combination of 1) growth from the 21st century going digital and requiring more computer chips, and 2) political pressure in both the United States and China to increase manufacturing capabilities… is giving tremendous momentum to this industry. In fact, the best-performing mega-cap technology stock over the last year is a below-the-radar company that is mission critical to bolstering our semiconductor manufacturing industry. 

If you want to learn more about the investing angle, check out the article we’ve created for this week’s news:

Three Reads...3 Numbers

Mildly Interesting: Inflation (of) Expectations

Source: U.S. Bureau of Labor Statistics

Transient or not?

Are inflation expectations suffering from a bout of inflation? Despite the Federal Reserve’s assurances that rising prices are transient and manageable, Wall Street appears certain we’re living through 70s-era price increases. Nearly everywhere you look, the prices appear to be exploding. What gives, Chairman Powell?

Fortunately, the Federal Reserve’s viewpoint appears to be supported by the data. Per the last consumer price index survey, the largest year-over-year price increase drivers were heavily impacted by supply constraints during the pandemic:

• Used vehicle prices have exploded due to an automotive production shutdown amid a global chip shortage
• And oil prices were boosted by severe OPEC production cuts.

Earlier this year, U.S. treasuries moved aggressively higher, which signaled Wall Street was expecting more inflation ahead. Yet, with yields retreating from recent highs, it appears the Fed’s opinion of transient inflation is gaining steam.

Money Advice of the Week: How I Saved $1.25 Million In 5 Years

Earn doing what you love

Last week we featured ‘50 Things I’ve Learned About Money,’ from Millennial Money founder Grant Sabatier.

This week, we’re taking you back to the start of Grant’s journey, when he went from having a bank account balance of $2.26 to saving $1.25 million in five years.

In this post, Grant provides a savings calculator and analysis on what it takes to save a million dollars. In addition, he shares some of the top advice he discovered on his path from $2.26 in savings to $1.25 million in five years.

On the Move: AMC Entertainment (AMC) 🚀🚀🚀🚀🚀

The move

Up 24% on Tuesday. YTD return of 1,698%.

The reason

The volatility continues. On Tuesday shares of meme stock AMC rocketed higher when it was announced that CEO Adam Aron was to be named as chair of the board of directors. AMC has replaced GameStop as the most-popular stock on message boards due to Aron’s embrace of retail traders.

The best news for meme stock investors was relayed later in a press release when it was revealed that all of Wanda Group’s executives have left the board. Chinese-based Wanda became the controlling shareholder of AMC in 2012 and sold off the entire stake in March. Now the board is fully aligned with the retail investors that Aron claims own 80% of its shares.

While we can’t look away from these developments, at Millennial Money we believe in avoiding meme stocks or only allocating a small part of your portfolio as speculative investments.

In the News: Netflix (NFLX)

The news

Shares of media streaming juggernaut Netflix sank 3% the day after reporting second-quarter earnings. Netflix topped analyst expectations for revenue, but investors were disappointed in subscriber growth and EPS results.

The stock angle

Netflix suffers from outsized expectations. Branded as a stay-at-home stock, shares of Netflix advanced 67% in 2020; a difficult performance to repeat this year. Despite beating analyst expectations on revenue and net subscriber additions, investors reacted negatively to the fact the company lost 430,000 subscribers in the key U.S. and Canadian markets.

Apple’s rumored BNPL program exists only for transactions conducted on its Apple Pay platform while Affirm chooses to partner with merchants and embed their solution on their website.

The play

Netflix remains the best streaming service and the format still represents only 27% of TV screen time. Subscriber growth was always expected to slow amid competition from Disney and other services, but the company grew its top line 19% over the prior year. Netflix is spending $17 billion (about $52 per person in the United States) on content (including gaming) and expects subscriber growth to increase by 3.5 million in the next quarter.

Quiz Time: Global Foundry Revenue

Taiwan is the largest chip manufacturing (foundry) market for revenue. What country is the second-largest foundry by revenue?

1. United States
2. Germany
3. South Korea
4. Mainland China

Stock of the week: Applied Materials (AMAT)

appliedmaterials.com

The Stock: Applied Materials (Nasdaq: AMAT)
Price: $137.26
The reason: A power player in the center of the global chip boom

Applied Materials is the best pick-and-shovel play for the growth of the semiconductor manufacturing industry. The opportunity here is massive: you know the future will be dominated by tech-intensive industries powered by silicon.

(Worldwide sales for semiconductors are currently $530 billion with forecasts for the industry to nearly double to $1 trillion by 2030!)

Global manufacturing capacity will need to ramp up to provide the semiconductors needed to meet demand. Additionally, governments and companies are paying closer attention to where chips are being manufactured. Simply put, we need more foundries.

Chipmakers are spending billions on these efforts. Intel shocked Wall Street when it announced it had committed $20 billion to building two new fabrication facilities. (Taiwan Semiconductor Manufacturing Company has committed nearly $100 billion in the next three years, so it’s likely you’ll see increased spending from all foundries in order to catch up.)

This is Applied Materials’ opportunity as the company manufactures the critical machines and equipment needed to turn raw materials into finished chipsets.

Applied Materials has been printing chips, both literally and figuratively. With a one-year return of 115%, Applied Materials has quietly been the best-performing mega-cap (over $100 billion) technology stock. Applied Materials hasn’t disappointed: in the second quarter the company reported revenue growth of 41% and net income growth of 76% through margin increases.

There are certainly risks. Demand for its products is cyclical and heavily dictated by semiconductor demand. Applied Materials could sell off if the company experiences a chip oversupply situation like what happened in 2018.

Additionally, at 33% and 19%, China and Taiwan are a significant part of Applied Materials revenue this quarter and could be impacted in the short-term if there’s a decoupling between the United States and China due to the Taiwan dispute.

Ultimately, these are short-term risks. We’re in a chip super-cycle as demand for car, phone, and data center chips will keep demand for manufacturing capacity high. While Applied Materials has competitors like Lam Research, the complicated nature of this equipment and the knowledge required to manufacture it is a powerful barrier to entry.

In the long run, Applied Materials has a significant runway for growth equipping chip manufacturers, and this is increasingly a matter of national security. Despite what happens in Taiwan, Applied Materials will reward investors for years to come.

Want more details on Applied Materials?

• The company made our list of the top 10 semiconductor companies.
• The Motley Fool breaks down 3 reasons Applied Materials could outperform for years to come.

ANSWER: C: South Korea. The country’s revenue market share is 18%, mostly on the back of Samsung’s foundry operations.

*Based on $299/year list price. Introductory promotion for new members only.