Motley Fool Hidden Gems Investing - The Chip Biz: Taiwan and Intel

Episode Date: April 3, 2024

The chip industry is center stage this week – Intel’s foundry losses now might prove negligible as the world looks to diversify beyond Taiwan.  (00:21) Asit Sharma and Dylan Lewis discuss: - The 7.5-magnitude earthquake in Taiwan affecting TSMC and highlighting global dependence on the region for chipmaking. - Our first look into Intel’s foundry business, and why we’ll probably see more pushes into manufacturing. - Bob Iger and Disney’s board victory, and where the company should be focused now. (14:36) An overlooked benefit of AI? Weather prediction. Ricky Mulvey caught up with Spire Global CEO Peter Platzer to discuss the company’s partnership with Nvidia and unique uses for space satellite data. Companies discussed: TSMC, INTC, DIS, SPIR, NVDA, CAT Host: Dylan Lewis Guests: Asit Sharma, Peter Platzer, Ricky Mulvey Producer: Mary Long Engineers: Dan Boyd, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

Dylan Lewis We've got two different stories on the global chip trade. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst, Asit Sharma. Asit, thanks for joining me. Asit Sharma Dylan, I appreciate you having me. We've got two different looks at the world of chips and an update on a chippy board vote as well. So let's start out with the news in Taiwan, the country dealing with its largest earthquake in 25 years, a 7.5 magnitude earthquake affecting plenty of things locally. So far, hundreds injured and there have been deaths as well and a lot of damage. So obviously our thoughts and concerns

with the people that are there locally as they're dealing with that. The market's focus as they look at that, is with the operation of chip manufacturing, because Taiwan is home to Taiwan Semiconductor. Osset, perhaps probably one of the most important chip makers in the world. Yeah, certainly, Dylan. Something like 90% of the world's most advanced chips are manufactured at TSMC. Anytime you have some type of cataclysmic event, investors return to the big risk of investing in TSMC, but also the risk to the entire supply chain of chips that power economies all over the world. This is something that I think TSMC and really Taiwan has been, in a lot of ways, somewhat prepared for. They've gone through

this before. I think back in 1999, they were hit with an earthquake of a similar magnitude, and they were able to very quickly get things back up and operational. I imagine that will continue to be the case here, and we'll see a pretty quick reaction. But it does seem to really highlight that there is so much dependence on a very small portion of the world and one that is really subject to these massive impacts by way of earthquakes. Certainly. I think we should really commend the company, first of all, for its preparation after that earlier round of earthquakes so many years ago. The fact that employees are returning to the fabs, the latest news we have, that they're going to start production

back up, I think says a lot about their preparation for this event. But you're right, Dylan, everyone is aware of how critical this one tiny island is to the world's technological advancement. TSMC has been investing all over the place to try to diversify outside of their base in Taiwan. They have a new plant in Japan, in Kumamoto, which is on the island of Kyushu. That's an $8.6 billion FAB. They're following that up with a second one that's going to be around a $13.5 billion investment. There are two extensions right there. Of course, they have a FAB in the works in Dresden, Germany. That's an $11 billion investment. They have their Arizona FAB, and a second one that's supposed to be built in Arizona. Those are,

of course, multi-billion dollar investments as well. But it's interesting, if you look at the processes behind each of these planned manufacturing plants, they're not the most advanced chips. They are chips that will help among a wide range of industrial applications, but most of these are going down to five and four nanometer process at the most. If you look at where TSMC is building capacity for its most advanced two nanometer process chips, are in three cities in Taiwan. It's going to be years, I think maybe a decade out, before various players like Taiwan Semiconductor, like Samsung, like Intel, can really make a dent in this concentration. We're stuck with this situation, or investors are, but

the good news is that there is a lot of investment around the world. Of course, here in the U.S., We have the CHIPS Act, which is trying to spur some of that investment stateside. To dig into the jargon a little bit for people that are more casual observers of the chip market, you mentioned Fabs there, Asit. I think, crucially, TSMC is a company that manufactures chips. We have a lot of other chip companies out there that use TSMC for the manufacturing on chips that they design. You name-checked Intel there as well.

They are increasingly pushing into this business. They want to be more involved on the foundry and the manufacturing side. Actually, this week, we got a look into what those ambitions look like. At the moment, it's a money-losing prospect for Intel, but you have to imagine that they're going to continue to push into this space, just given everything we just talked about. Right. So, Dylan, Intel, a few weeks ago, told investors that it's really formally going to divide the company up into one part that designs chips and makes product, and a second part

which is going to be that manufacturing or foundry fab business. We got a press release and an SEC filing out of Intel yesterday, which, for the first time, broke apart the results of the foundry business, which they've been working on for a few years. It showed some stunning losses. The company had about $19 billion of revenue in its foundry business. It lost $7 billion on that. I think what's worrying for some investors is that run rate a little higher than the previous years. They actually went back two years. The company was generating this loss of roughly $5 billion from its foundry in 2021 and 2022. That's jumped to $7 billion on lower revenue. Now, on the other side of this is ambition.

Investors sometimes don't like ambition. When you tell the market that we're going along this journey, which is going to take about five to seven years, but hey, we've got some great customers. Microsoft is going to be a Foundry customer. Investors just, I think, always lean towards instant gratification if we can get it. When Intel tells us that, look, these losses will hopefully trough from here, maybe we'll hit breakeven next year in 2025, but really we'll get momentum around 2030, that's not a message that the market likes to hear. Although, for those of us who are very long-term investors and want to study Intel's roadmap and its potential to get a lot of blue-chip customers for its Foundry business, it could

be an interesting investment. Asit, I was going to say, shares down 7% on this news. The fixation was clearly on the losses here. But this seems exactly like the long-term bet you'd like to see a company like Intel make. Let's be honest, you look at the five-year chart for this business, it's not particularly inspiring. They are trying to find opportunities for growth. There's a clear global need in this space. It feels to me like this is something where the short-term hiccups are maybe distracting people a little bit from the long-term vision that this company has. You may be right, Dylan. Management has been pretty upfront on a number of things

they did wrong. They're like, we didn't really hire enough talent. We didn't invest enough and capacity. We didn't buy enough of the extreme ultraviolet lithography machines that you can buy from ASML to compete at this level. All that has to be done, it's billions in capital investment, it doesn't happen overnight, to get really good at this stuff. But it's a start. If any company on the planet has the legacy technology to make a leap, it's tell. They were the world's leader before TSMC came around and stole that mantle from them. There's still, I think, a lot of capability in the company. They've hired a ton of new engineers to work on this process, getting their fab process down to where the cost structure isn't

so large. It's a story you want to follow if you follow this industry at all, because it means something not just for investors, but for the planet at large, in the context of that concentration in TSMC that we were just talking about. You named the CHIPS Act earlier. Intel was a big beneficiary there. I think they received about $8.5 billion in funding from the CHIPS Act. I think they were eligible for about $10 billion in loans related to it. Given the news that we see from Taiwan this week, and given Intel's push, to me, it seems like both for TSMC and for the global chip industry. We are only going to see more and more of a push to diversify outside of Taiwan

when it comes to the manufacturing of these chips. Yes. And I think also from the Taiwanese government, we may see a little bit of loosening of that relationship. They've always incentivized TSMC to produce internally, just as here with the CHIPS Act, we're incentivizing companies, both domestic and global, to produce here. But I think the Taiwanese government is also seeing a way that they can continue to benefit. That's partly because so much demand is surging from generative AI that if TSMC were to keep its most sophisticated processes in-house on the island, but keep expanding for not so sophisticated chips around the world, that's a plus for them, it's a plus for Taiwanese GDP. I think the writing is on the wall all over the world.

The only problem, though, that I worry about is that as much as all of these companies are trying to expand production, it just seems like there's an insatiable appetite for AI. At the end of the day, are we just going to be filling capacity for more demand rather than being able to substantively diversify outside of this one choke point. But, yeah, that's all for the future. Maybe if you and I are around in 10 years, let a decade pass and we'll see how things shake out. By then, I think Intel's foundry business will be break-even, Asit, so we'll be able to check in on that as well. More than that, maybe. Alright, our final story for the News Roundup today. It seems Disney will be able

to stave off its chippy argument with activists looking for seats on the company's board. We're taping as the company's annual meeting of shareholders is happening. But from Reuters, There are reports that Disney's board of directors have the votes to keep Nelson Peltz and former Disney CFO Jay Versullo off the board. Asit, what does this mean for Disney and Bob Iger? I think for Disney, it means that they can continue to focus on the simple things they need to do to get better as a business and resume the great cadence of earnings they had before things fell apart, which was made up by the parks earnings, by the movie business, streaming, ESPN, etc. I think it also means that the board has this wake-up call,

which will now turn towards the succession, like who comes next after Bob Iger. I do think that Nelson Peltz had many good arguments to make about Disney. I think they did mismanage that movie business. It's just way too much quantity without quality. Bob Iger is trying to solve that. But, you know, he never had a persuasive argument on the board level. His whole, or Tryon Partners' whole 130-page white paper was basically, look, Disney sucks because of bad management, but it can be fixed by two board seats. What they really need is a better board. What they really need is a better cost structure.

They need some wheeling and dealing, which, you know, Iger is doing. He's trying to find partners for ESPN. We saw the partnership with Epic Games for the Disney brand. And they need to build the brand as well. So, it's basic stuff, basic blocking and tackling. But you do need a consummate entertainment mogul with deep experience, like Bob Iger, to pull this off. So, I think from here, we'll probably see maybe even more momentum behind Disney stock. It's been the best-performing stock in the Dow, with good reason, because it had totally tanked last year when pessimism was at its highest. So, I think you'll see a

reprieve there. But right now, investors are going to be focused on the earnings, on those unit economics in the streaming business, on the unit economics of the parks and the movie business. That's really what matters. The way I look at it, Asit, this solves maybe a symptom of the sickness of Disney, but there is still broader illness that needs to be addressed by this business. Does that seem fair to you? I think so. I think it was a really healthy call-out, this whole proxy fight, which is to say that Disney has missed a lot of opportunities. They allowed themselves through probably poor succession planning to fall from a pinnacle. The movie business itself

was a juggernaut up until the pandemic. I mean, billions of profits, every year blockbuster movies, that's sort of totally gone now. They're really a second at the box office and in some quarters a third. There is a lot in this whole proxy fight, which is drawing attention to a company which had all the advantages, all the brand advantages, but just couldn't stick to its game and couldn't evolve rapidly enough. This is a symptom of something that is a larger problem. It looks on the surface like Iger is treating that, but time has to tell. The Proposition still has to be proven. I'm sort of a bull on Disney, but I know that one quarter doesn't make a difference. We've got to see several quarters, especially in that streaming

business, of moving towards profitability. We've got to see a few movie hits. But I like the lower cost structure. I like the fact that they're not trying to just cram a bunch of sequels down the throats of loyal viewers. So, that sort of quality over quantity with a lower cost structure should help. But yeah, it's going to be such an interesting year on all fronts. I don't think the drama ends here just with the subsiding of this proxy fight, Dylan. Yeah. Maybe now that the distraction of the proxy fight is gone, we can have that focus on the business and some of those improvements that you want to be seeing. Asit Sharma, thanks for joining me today. Thanks a lot for having me, Dylan.

Coming up, weather forecasting could get a lot more interesting and accurate. Ricky Mulvey talks with Spire Global CEO Peter Platzer about the company's partnership with NVIDIA and why every business needs a space strategy. so i've heard you say that basically every company needs to have a space strategy what's a space strategy look like maybe maybe inspire to begin so i ever since being a kid had like this vision of how can we leverage space to improve life on earth but it was this very very slow-moving beast at that point in time, because fundamentally speaking, it wasn't powered by an exponentially improving technology. Like, we all lived through the 80s and 90s and had read about

the explosion of compute capability as Moore's law provided a 2x performance every two years. Now, what has happened recently is the same thing in space, where we have something that came out of research in my last graduate degree in France, 10x performance every five years. So about the same as Muslim, maybe a little bit faster. And as that has been deployed now with more and more capabilities and applications, McKinsey, in a recent report, came out and said, guys, if you do not have a space strategy now, you need one. Because this is a technology providing data from the ultimate high ground that is influencing almost every single aspect of modern life. So what are some industries then, if every industry company needs a space strategy,

what are some industries that maybe aren't thinking about it, but maybe they should? So I think, for example, energy companies are not necessarily fully embracing and understanding what is already possible today. Anything from monitoring greenhouse gas emissions to pipeline performance to weather impacts that is driving the demand for their products is something that you can do on a global scale from space. That's the power of space. As soon as you operate in space, you provide data from anywhere on planet Earth. Even just very, very hardcore companies like a Caterpillar, they have operations all across the world. And many of the operations are, for example, impacted by the weather. Now, by incorporating capabilities that are

powered by space, for example, weather prediction or local weather measurements, they can vastly improve their operational results. They can also improve the tracking of their devices and the operation of their devices. Global trade is something that is happening to about 90% or more on ships. And those performances of global trace, the logistics supply chain is impacting, I want to say literally every single industry that we can think of by incorporating information of like when something is where, when, and how they can improve their outcome. Those are just some examples that I can think of where we have seen companies maybe at the verge of leaning into it, because they still think of space as something that costs

a billion dollars and takes a decade to deploy. But costs and timelines have come down more than an order of magnitude in the last 10 years. One big focus of your company is weather, and this is for your mission of helping out on climate change. But what's the kind of data you're picking up with your satellites that allows you to make better weather forecasts? So we track very, very finely granular temperature measurements. We're literally talking every few hundred meters all the way up to 60 kilometers. We track soil moisture, which has huge impact on the creation of thunderstorms over land. We track ocean surface wind speeds, like, for example, hurricane wind speeds.

And we track rain, which, of course, is obviously impactful for the weather. But we're also, like, in the process of tracking what the meteorologists call it atmospheric moisture. You know, you and I would probably call it clouds, all of which then goes into weather prediction models. Now, a third of the global economy, that's over $30 trillion of GDP, is impacted by weather. Now, admittedly, you can't necessarily change the weather, but at least 10% of that weather impact, scientists have estimated, is mitigatable, as I said, avoidable by knowing what the weather is going to be. That's $3 trillion of economic output that is lost because we don't yet know what the weather is going to be far enough in advance. Having more data and having the right types of models and compute capabilities allows us to impact industries as far ranging anything from logistics to transportation to energy production to renewable energies to agriculture and much more by telling them what is going to be the weather early enough in advance. So, the National Weather Service and NASA also operate weather satellites.

What is your company doing differently, or more specifically, maybe, than the weather satellites that are already out there? So, it's not an either-or, it's an and, right? So, we are providing data to both NASA and NOAA. NOAA, in particular, is one of the premier institutions in the world in collecting data from space to drive weather prediction. And we are a provider of data to NOAA and NASA to help them further their kind of outputs. But we are also taking data that they do not purchase from us and feed it into our weather

models. We're also taking data that they are producing because they're, of course, a public good and they're sister organizations across the world and feed that into our weather models. And then we can make them very, very specific to a particular use case. Like, what is the wind speed going to be at, like, 300 feet off the ocean surface area offshore for a wind farm? What is going to be the ceiling visibility over an airport? What is going to be the temperature, and is it going to freeze or not for an aircraft landing or for a street? So being very, very precise for a particular business use case and in a particular location, very often in remote areas, that is something where Spire can help corporations and sometimes countries as well with our data and our weather predictions.

I can also see this being significant for events. If you're planning a large-scale event for people, you might need to know a little bit sooner than others. Correct. One partnership you signed that I'm sure our listeners are very interested in is with NVIDIA. And a lot of it has to do with your weather data and their sort of simulated Earth model. But that's the very rough outline. Can you provide a little more color or tell our listeners about this partnership you have with NVIDIA?

So AI and machine learning is one of the technologies that we had identified very, very early on as one of the supportive driving forces for demand of Spire. Because what AI and machine learning models allow you to do is they shift the power from those that have access to massive supercomputers to those that have access to massive super data. So it moves that power to those that have differentiated hard-to-get data. And we always knew that we had capabilities to collect very, very valuable data. And now NVIDIA, of course, is the premier institution of providing those AI machine learning infrastructures where you can train the models and then can run them on. And so we're very, very excited, of course,

of that partnership of being able to leverage that hardware infrastructure, as well as the training infrastructure, and then bring our data to the table to create capabilities that are more accurate and more valuable to our customers and are applicable to even more customers than it have been in the past. So, how does this partnership work? You have a large data set that NVIDIA seems to want. Are they paying you for the data set? Are you paying NVIDIA to use their AI platforms? Or is this, as we say, technically a tradesies? Technically a tradesies, I would say. It is a true partnership where both parties bring their supreme capabilities to the table, then create outcome that is better for both of their customers. Right now, you have 100

satellites in orbit i'm a neophyte on this i know very little about about space but what do you dream about finding out maybe three to five years from now ten years from now if you had maybe 200 a thousand ten thousand satellites in orbit giving spire data to make decisions so for us we actually feel pretty comfortable with the number of spacecrafts that we have but i understand where you're going from, right? And I dream of a future where we can really make weather as predictable as Swiss train schedules, where we can really help humanity tackle climate change and reduce that negative impact from the unpredictability and increased severity of weather, and where we can bring transparency. And transparency is just the best disinfectant when it is shown into areas

of the world that are trying to do something on the dark side to help global security be on a much more level playing field. And if we can keep on walking down that pathway, making weather prediction as accurate as Swiss or Japanese train schedules and bring global transparency to all corners of the world and bringing that transparency there, I think we have really made a difference. So you have a net revenue retention rate above 100. Now that you have more than 100 satellites in orbit, your company seems to be shifting towards more operating profit. Is that part of the reason you're able to do that? As you just said, you're like, we got plenty of satellites in orbit. We don't need to launch double, triple these. You're totally nailing it. For us,

it's really, we are fully deployed from a constellation perspective. And now we are fully in monetization mode. Last quarter, we announced we had a very, very strong cash flow from operations positive. We achieved adjusted EBITDA positive, you know, ahead of schedule. And it really comes from the monetization of a deployed capability that, yes, we maintain it, but it's, you know, five, seven million bucks a year that allows us to just maintain that infrastructure and keep on driving new products with new customers coming online, just like in any data business with very, very little marginal cost. You understand Foolish philosophy quite well. You know what it means to be a Foolish investor, and we're talking to quite a few of

them right now. What do you want to leave the Fools with? How should they continue to track and monitor the growth of your company? I think the way you should look at Spire is that you should start by, it's a SaaS company where you can look at an ARR. You can look at the high net retention rate of the company, and you can look at the profitability of the company. And then you can look at, in particular, the sales cost of the company compared to more typical SaaS companies. And you start to see that, oh, that sales is a much, much smaller portion because we have combined the best of deep tech companies, high and massive barriers to entry with the scalability of SaaS companies. And then you look at the multiple that the company is

trading and the growth rate. And, you know, I remember when I was an avid reader and customer, you know, there is always like this, you know, where can we find 10 beggars? And I think a combination of a highly scalable business model that has very high margins, I mean, you know, close to 70% gross margins in a massive TAM that is supported by global trends, that is trading at a very attractive multiple compared to similar companies is a place where we fools normally would look for potential tenders, I guess. As always, people on the program may own stocks mentioned, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear.

I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.