Semiconductors: Tech sector may rely on Taiwan ‘longer than many want to,’ analyst says

CFRA Research Senior Equity Analyst Angelo Zino joins Yahoo Finance Live to discuss the future of U.S. investment in chip production, TSMC's plans to build a chip plant in Arizona, and more.

Video transcript

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SEANA SMITH: Chip stocks on the move this afternoon. You can see all four of the big names are trading to the downside. Now, Apple CEO Tim Cook announcing that his company is going to be buying chips made in the US. He's referring specifically to chips being made in Arizona, where Taiwan Semiconductor is announcing plans to build a second chip plant in the state. President Biden will be there, too, to talk about bringing more chip production to the US. His comments are expected to get underway in just about a half an hour.

We want to bring in Angelo Zino, CFRA Research senior equity analyst. Angelo, it's great to have you. So you were out with a new note today saying that this investment from TSMC is a positive, but doesn't alleviate supply chain risks. Why?

ANGELO ZINO: Yeah, so listen. I think when you kind of think about the broader semiconductor industry, the 800-pound gorilla in the room is the fact that we're in the biggest risk in the industry is the fact that there is too much capacity-- foundry capacity-- in Taiwan. And, you know, there is significantly increasing risk that-- of a potential China attack or takeover of Taiwan here in the future.

So there's this need to, you know, significantly increase capacity outside of Taiwan in terms of the chipmaking side of things and into other, you know, Western-type markets like a-- like Europe as well as the US. And when you kind of look at this investment here, you know, $40 billion-- you know, an increase from the $12 billion-- definitely a positive. You've got more capacity coming online here in the US over the next couple of years. But we question whether or not it's the right capacity, at least on the Taiwan semi side of things, right?

They're-- in 2024, they're going to be developing four-nanometer chips. The second factory in 2026 will be on 3-nanometer, 3-nanometer technology. But when you kind of look at what Apple is utilizing today, right, in terms of the iPhone 14 Pros, they're utilizing 4 nanometers already. In terms of 2023, in terms of the 15, we expect them to go on 3-nanometer. So this is essentially going to be trailing edge technology for them, whereas the industry really needs more kind of leading-edge technology, we think, in some of these Western markets.

- Cook also saying this is an incredibly significant moment. It sounds like you don't entirely agree with that assessment. How significant is it for the US semiconductor industry moving forward?

ANGELO ZINO: I feel this, and I think it's important. Again, it's something where we are getting more capacity here in the US. It's needed you know, clearly, and you're seeing it not only from Taiwan semi, you're seeing it from Intel. And Intel is going to be critically important because they are shifting towards a foundry-type business model. And, you know, you're going to get more of that foundry capacity here in the US.

But again, you know, we don't think you're necessarily looking at the-- the right kind of leading-edge technology that you need. And the fact of the matter is, when you look at Taiwan semi, right, they control about more than 50% of the foundry revenue here on a global basis in 2022, over 90% of the advanced chip production. So that's really the key, at least on our end of things.

And as you kind of look towards the 2024 and 2026 plan, I don't know if you're necessarily going to see that supply chain diversification on the Advanced technology side of things again. It's good to have. Over time, I think you get there, but probably not something you see here over the next three years or so.

SEANA SMITH: That's interesting. So Angelo, are we seeing something that we could be reliant on shipments here from outside the US, then, when it comes to chips? Because we were initially thinking that this would be a huge move here for US chip production, that we wouldn't be as reliant on some of the overseas makers. So that, in fact, may be more of an 8-to-10-year-type timeline?

ANGELO ZINO: So, you know, as far as we get-- I mean, listen. I think when you kind of think about the broader supply chain industry, right, I mean, it's extremely complex. We're talking about hundreds of chips that go into potentially an iPhone here, right? And they're relying on tons of different geographic regions, whether we're talking about the memory side of things, whether you're talking about kind of the A6 chip that you're talking about that's currently being produced out in Taiwan-- eventually, kind of all this stuff currently being, you know, put together out in China.

But maybe to your point, you're going to need to rely on Taiwan, I think, a lot longer than many people want them to. But again, I think having that additional capacity in the US is definitely a good thing, and maybe potentially, you know, Taiwan continues to, you know, to revisit their production capacity as they look out towards 2026.

If you look at the 2024 plans here, originally it was supposed to be for 5-nanometer technology. They currently are now looking at four-nanometer technology. So, you know, I think there's also the possibility that over time, you could potentially see some sort of shift depending on what the client need out there is. And of course, Apple is going to have a lot of say in that.

- Semis having a tough day, as Seana pointed out early on in the program. Why? And what's the catalyst as we move forward?

ANGELO ZINO: Yeah, I mean, listen. I think we're kind of well under way in terms of a correction that likely started in Q2 and into Q3. I mean, we're talking about a number-- we're talking about essentially rolling recessions that are taking place across a host of end markets, right, started in a number of the consumer-driven markets-- PCs, gaming, smartphones, kind of trickled into industrials.

The only area that remains strong in our view continues to be autos as well as the Apple supply chain, which we think, you know, both areas will eventually roll over before we see a bottoming process take place, you know, early in Q1, Q2 time frame. So if there is a catalyst, it is the fact that we kind of have seen a lot of damage done here. The estimates for 2023 likely look a bit too high to us. We're looking for revenue down about 5% to 10% next year, Street probably down that low single digit percentage.

So we've got a little bit more work to do here, but we do think a lot of damage on the stock perspective side of things and already with some of the estimate revisions we've seen, especially at the Q3 earnings season, has kind of been well-reflected in a lot of these names.

- We'll call it overall some cautious optimism from Angelo Zino. Good to see you, sir. Thank you.