President Biden signed the landmark CHIPS bill into law that promises to boost the domestic semiconductor industry to better compete against China. Cheddar News speaks with Abhinav Davuluri, Strategist at Morningstar, about how companies could benefit from the new law and his outlook for the sector.

Closing Bell

How Will Biden's Chips Law Impact the Semiconductor Industry?

the news is closing bell. Everyone I'm kristen chiller down here on the floor of the stock exchange. And the president signing a landmark bill into law today that includes nearly $53 billion in subsidies for domestic semiconductor research and development. It's called the chips in science law. And it promises to boost the U. S. Competitiveness in the fields of science and technology compared to rivals like china, the world's second biggest economy. Here's what the president had to say at the signing. Take a listen once in a generation investment in America itself a law that the american people can be proud of. I called for elements of this law when I first came to office, I want to thank everyone everyone here who helped make it possible. Okay, well joining me now is Aminov Davuluri strategist and morning star financial services from thanks so much for joining this afternoon. This bipartisan law with support from both sides of the aisle setting aside a very large chunk of the $280 billion package for that domestic semiconductor industry. We've seen though a slowdown in industries like gaming and pcs of late, certainly warnings from semiconductor companies this week. Micron and NVIDIA, Just to name a few what is your outlook for the sector now that this bill has been signed into law? Yeah. So you know, I think it's important to think about the long term. The fact of the matter is this is about a $650 billion $680 billion $1 trillion 2030. And the bottom line is that we don't have enough capacity to meet that kind of demand and the capacity we do have over 80% of it sits on the doorstep of china in either Taiwan or south Korea. So that is the status quo that obviously the U. S. Government is trying to alleviate by having more domestic manufacturing. And this is where the $52 billion will help primarily for companies like intel micron texas, instruments, globalfoundries firms that have already a decent amount of domestic manufacturing and it'll help make the cost a little bit more manageable to build these fabs. I'm just curious obviously we've seen the global supply chain challenges persist during these past two years plus of the pandemic, just how complex is semiconductor manufacturing. I've heard myself that it requires extreme attention to detail. These are tiny, tiny but extremely powerful chips. What do we know about how important this manufacturing line is? Yeah, no it's it's really important and not only for things like the iphone or your computer or or things like that, but also military equipment, automotive, pretty much everything is going to have some sort of chip and is gonna be connected to a network at some point in the future. So this is really the rising tide that people are trying to get ahead of. And the complexity is just ridiculous, not only technologically but also for from a cost perspective. So you know it takes anywhere from 60 to 90 days to make some of these chips and the costs are going up like crazy intel is gonna spend about 25 to 26 billion in Capex this year. Tsmc spending about 40 to 44 billion. And those costs are only going to keep going up. So yeah this this bill will definitely help share some of that cost. And if we think about, you know which stock in which names are going to benefit the most, not only the companies that are making these chips, but actually the companies that are making the equipment that makes these chips companies like applied materials and S. M. L. And L Research. Yeah give me some more of those companies, obviously it's going to have a knock on effect. I know you're a strategist at Morningstar and so what are the companies on the periphery, additional ones that could benefit. Yeah. So I actually started my career at Intel and on the manufacturing side as an engineer. And you know we worked where we worked very closely with companies like SML and Lam Research, Applied materials, Tokyo, electron and K. L. A. You know these are five companies that account for over 70% of total equipment spend. They all kind of have their little monopolies and in the various areas that they play in. Um So yeah these are the arms dealers, they sell equipment to every single major chipmaker. So if I need to, you know decide on which stock to invest between like an intel or an M. D. Or an NVIDIA. Um you know I'm worried about, you know, which company is going to win a new socket in the next iphone. Um these equipment suppliers, you know, you basically don't have to pick, they all benefit from this kind of rising tide of spent. Um Abby Nava. Certainly we've seen investors punish some of these semiconductor stocks definitely today it's the reason that we see the NASDAQ underperforming down more than 1% because of warnings this week from Micron from NVIDIA as well, even though the supply chain is still struggling across all industries out there, including the chip industry. Do you think once that can get ironed out some of these investment dollars that the president has just signed into law that there will actually be strong demand for these chips going forward? Yeah, I know as I mentioned earlier, we're approaching about a $1 trillion 2030. But that's not to say that there still won't be cycles and ups and downs. You know, the PC markets pretty weak. The gaming, the graphics market because of the crypto mining crash that's impacting companies like in video that had their pre announcement. So there is weakness in the short term but if we zoom out and think about it five or six year trajectory. You know, we're still very positive and I think the market is still very positive as well. And I think what we like that we've seen more recently is companies like Micron take their foot off the gas pedal in terms of building up capacity and basically slowing some of their Capex and supply growth to basically let the market and supply demand kind of come back into balance. But even though we have weakness and PCS and smartphones, there's still the shortage happening in the auto industry and industrial and some of those end markets. So ideally of these next couple of quarters, as some markets slow, other markets can kind of pick up the slack. Alright. Davuluri strategist and Morningstar financial services firm, thank you so much for joining.