Motley Fool Hidden Gems Investing - The Chip War’s Next Chapter

Episode Date: May 24, 2023

Tech tensions between the U.S. and China continue to heat up. Micron is stuck in the middle and Apple looks to future-proof its supply chain.  [00:21] Asit Sharma and Dylan Lewis discuss: China’s ban on Micron chips for companies working on key infrastructure projects. Apple’s multibillion dollar deal with Broadcom and the company’s increased investment in U.S. manufacturing and supply chain. How investors should be looking at the tech hardware companies in their portfolio. [13:57] Deidre Woollard talks with Yanely Espinal, author of "Mind Your Money," about the unique challenges that immigrant families face while saving for retirement and the dangerous appeal of "Buy Now Pay Later." Companies discussed: MU, AAPL, AVGO, BRK Host: Dylan Lewis Guests: Asit Sharma, Deidre Woollard, Yanely Espinal Producer: Ricky Mulvey Engineers: Dan Boyd, Austin Morgan Learn more about your ad choices. Visit megaphone.fm/adchoices

Dylan Lewis. We're digging into the chip makers. 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. Dylan, thanks for having me. Good to be with you. I want to talk about chip news. There's a lot of it this week in the component and hardware supplier market. Shares of Micron are down 4% this week after the Chinese government effectively banned Chinese companies working on key infrastructure projects from buying Micron's chips. The announcement came after a two-month-long cybersecurity review, and it seems to be an answer to past restrictions the U.S. government set on chips and chip-making technology.

Asit, there are a lot of angles to this story. I think maybe we can start out with the impact specifically to Micron and then broaden things out. I think it's an indication of where the chipmaking market is. Sure, Dylan. For Micron, this has been a growth market for them. They tend to add Hong Kong to Mainland China when they're discussing their results. If you look back at 2020, Mainland China plus Hong Kong, if think in terms of companies that are headquartered in these regions, made up about 39% of Micron sales. Now, in the past two years, they make up a smaller percentage, about 25% of total revenue, because Taiwan, which is more of an ally to the U.S. in this big geopolitical game,

has taken up some of that slack, but still important markets. Now, the CFO of Micron gave a little bit of information at an investor conference. He said, basically, they're trying to assess the impact. They do not have a lot of specific information from the Chinese government on what constitutes key infrastructure. Based on what they think, they feel that they'll have a low single digits to maybe high single digits, 9% or 10% impact on their revenue. It's not a small bite, but it could be something manageable in the near term. Micron is a big enough company that its exclusion, even if it is limited to those key infrastructure projects and people working on them, however that may be defined, will

create some noticeable space in China's semiconductor industry. I'm curious, do you feel like this is something where we'll see domestic Chinese manufacturers step into that, or other providers step into that space? Yeah, I think this is something where domestic manufacturers can step in. Micron may be a little bit different than some of the other companies that have come into this conversation because they primarily focus on memory modules, which are a little bit easier to backfill in terms of supply. Some of the tit-for-tat between China and the U.S. has to do with chips that are extremely powerful and advanced, or ever smaller chips where

you get to seven nanometers and below. This is less of that highly technical issue, but we have seen instances in which there have been considerable holes left for the Chinese government right now. Look back at Nvidia last year, the U.S. slapped some export controls over one of NVIDIA's most powerful chips, because the government is worried about China having access to supercomputing capabilities. NVIDIA had a workaround in which they supplied a less powerful version of that same GPU, Graphic Processing Unit. I think this is something where it will be relatively manageable for domestic companies to back Folsom Supply. I appreciate that nuance there. If I'm hearing you right, it sounds like this was

may be one of the easier ways for the Chinese government to step in and restrict and maybe have an answer to some of the restrictions the U.S. has covered without hindering domestic manufacturing and innovation too much. Totally. I think here, China gets a twofer in that the U.S. slapped some import restrictions on Huawei's products. We saw that back, I think, in 2021. That was about national security. The government phrased that up as being against our national security interests because some of Huawei's technology was coming into our 5G network. Now, similarly, China has a bit of a chance to respond to that and also their protest that we are restricting their ability to do their normal technological

investment and stuff for them, which has nothing to do with this global proxy war in artificial For China, from their perspective, it's just about advancing manufacturing capabilities and R&D capabilities. Of course, this is what they're presenting. But the nuance, when you read into this, is exactly what you're saying, Dylan. It's a way to thumb the nose back without causing major harm to their infrastructure growth. So, if you're a tech company not named Micron, how closely are you paying attention to the story? I think you're paying a lot of attention to this story because we understand that the Chinese tech industry is extremely vibrant. There's going to be supply going back and forth. No matter how

much these two gargantuan countries try to decouple, it's going to take years. We're very interdependent in that whole chip supply chain. You're paying attention because you realize is you may have at risk, in some cases, what we're just talking about, like high single digits or maybe even to the double digits exposure. But there are going to be workarounds available. There will be ways where companies can continue to sell product. I don't see any companies getting just closed out of supply chains. So I think this is like boardroom strategy right now, if you're not named Micron. You're sitting in that war room thinking, okay, if this particular branch of our product gets hit, how can we do an NVIDIA-type workaround and offer

the same architecture, but in a way that'll comply with whatever the technical barrier is that the government's pushing up? I love it when we have the opportunity to tackle a couple of stories that are all swirling in the same space. This show is one of them. We got the benefit of another news item related to hardware manufacturers and component providers, and that was that earlier this week, Broadcom and Apple announced a new multi-billion dollar agreement that will have the chipmaker providing 5G components to the iPhone maker. This new deal deepens the relationship between these two companies and is a piece of the commitment Apple announced to spend over $400 billion with domestic manufacturers and suppliers

back in 2021. Asit, it seems like, to some extent, Apple is future-proofing some of the things that we were just talking about for its business. Certainly, they're on the move. We've seen them slowly but surely moving supply out of China, some of their manufacturing capability for the iPhone into India. That's going to take a while, but they're on that path. This is another way for Apple to diversify its supply chain. Now, for Broadcom, that's the opposite. It's not diversification. They're getting further concentrated. Dylan, as you and I were discussing, before taping. They're already at 20% in terms of concentration risk with Apple. Apple makes up

20% of Broadcom revenues. This would seem to increase that. I will point out here that the 8K release, that's the SEC filing that Broadcom put out, refers to the deal as a statement of work. In the world of procurement, a statement of work is not like an ironclad guarantee that you're going to get a certain amount of revenue every year and that it's infallible. It's more like, hey, this is what the company intends to spend with us, and there's a high probability that we're going to realize this revenue. It's good for Broadcom. You picked up on something I think which is important here for investors of Broadcom to look at, even though this worries you because the difference between 10% and 20% ... Let's put it this way, 10% is a revenue hit,

you can manage that on your P&L. 20%, that's going to dig into earnings if you lose that customer. But the nuance here is that Apple is calling out in their press release that they are going to be buying up these FBAR or FBAR filters. This is a type of RF filter. Just think of it as a little component in a phone, which helps exclude bad signals and just helps with receptivity. It's something really specialized. Not a lot of other companies can supply it at this scale to Apple. I feel like, even though it increases that concentration conceivably, maybe it's not so tricky for the Broadcom investor who's been with this company for years anyway living under this kind of shadow. Yeah, I was going to ask you about that.

I think about the sleep number sometimes that we often suggest people try to find with their investments and 20% for me, in terms of an individual stock in my portfolio, it starts to creep to that amount where I'm a little bit concerned. When you see that much reliance on a single customer, I could see how people would worry about that. On the flip side, Broadcom is not a small business. It may seem like a small business relative to Apple, it's about one-tenth the size at $270-ish billion. But they are big enough that they are probably pretty meaningful to Apple's supply chain, even as they are so reliant on Apple themselves. I agree, Dylan. And the difference between a

company that is Broadcom size and maybe a much smaller company is that you've got the wherewithal to pile the profits onto your balance sheet. So if you do lose that customer or they reduce spend with you, you've already got these other avenues which you're exploring. You've put in the R&D. So, big companies, in some ways, can scale and stay with one or two really big customers for a much longer time than often a smaller company can do. Although, I will say, in the tech services industry, I like a lot of small consulting companies that are publicly traded that have these concentrations because they leapfrog and grow off the bigger company.

It's living on the edge a little bit, but over time, even they broaden out their customer base. I want to take a step back before we wrap up the show and put these two stories together for a moment and talk a little bit about the state of hardware. There is, I think, no mistaking it at this point, Asit, tensions and actions between China and the United States over tech policy continue to escalate. You mentioned tit-for-tat earlier. We're continuing to see that.

Back in October, the U.S. government set limits on chips and chip manufacturing equipment that companies can supply to China. This Micron news seems to be China's response. I think we see Apple putting hundreds of billions of dollars into U.S. manufacturing as a commitment that they're taking this pretty seriously. When you try to absorb all of this and think about, broadly, how people should be looking at the tech hardware companies in their portfolio, are there new or different questions that they should be asking when they're looking at businesses?

Dylan, I think investors should be looking at the number of these semiconductor companies they have and their aggregate effect on individual portfolios. There are so many great companies out there with amazing stories like TSMC, like ASML, which makes this super high-end equipment that you have to have to output very tiny chips. You can easily get concentrated in your own portfolio just because there are so many great options. NVIDIA is another one. I like NVIDIA so much, although the valuation is stretched right now. I think we might all have to do a little bit of Berkshire Hathaway type exercise. They just trimmed TSMC from their portfolio, I believe, because of geopolitical risks. Maybe it is time to ask ourselves, how much exposure

do I have to the worst-case scenario between the U.S. and China? The worst-case scenario is that both of these countries shoot themselves in the foot because they're so eager to decouple, and they are so eager to either try to protect intellectual property or get an edge over the the other country, that we end up just disrupting supply chains. We see many of these chip makers suddenly without those easy markets that they've had access to. You still want to invest in this space. We are seeing capital flows redirect. TSMC is going to be building plants in the U.S. The European Union is now trying to incentivize its chip industry and foreign companies to come build foundries there because they've seen how the U.S.'s incentivizing of capacity is

working out, and there's a lot of uptake of that. There's going to be, I think, still many places to invest, but yeah, we're going to have to pay more attention than we were just a couple of years ago. Asit Sharma, thank you so much for joining me today. Dylan, this was a lot of fun. I appreciate it. If you're interested in investing in the your parents have trouble saving for the future, what do you do? Deidre Wollard caught up with Janelle Espinel, author of the upcoming book, Mind Your Money, to talk about the unique challenges that immigrant families face while saving for retirement and the dangerous appeal of buy now,

pay later. One of the things I found really interesting in your book, I don't see a lot of personal finance books do this. You go kind of deep into financial history and the sort of history of money. I love how you call the economists uncles. Why do you think it's so important for people to understand that history of money, even stuff that's, you know, maybe even hundreds of years old? Yeah. You know what? I think that we're, our human brains have changed a lot given like all of the technological advancements that have occurred over the past couple of decades. But ultimately, you know, our DNA is wired to do one thing and that's to connect and to survive. And so when, when we think about that, how our brains function, especially in

relation to money, there are going to be some core things that you just need to know because these are just facts. And I feel like I was never exposed to that way of thinking or even just, you know, exposed to the idea that my money, when I'm thinking about, or my brain, when I'm thinking about money is going to function differently based on my belief systems, based on my values and based on my perception. So if I could influence and change and take control and power over my beliefs, my values and my perceptions, then I can actually control my thoughts and feelings and behaviors with

money. So I feel like that kind of all is rooted in history of money, how it works, understanding the behavioral economics components of money. So the psychology of money, and then also understanding the systems that are at play. You know, I mentioned credit and like your credit syllabus, but there's a much larger credit system at play, which I didn't know about. And I really think more people need to learn about those things because even when you feel like you might be doing everything the right way, the system has certain rules. And if you don't learn that history and those rules and the way these systems work, you might be doing something that's actually jeopardizing your chances of increasing your credit score or having a good financial reputation.

You know, a quick example, I'll say, like, in the book, I mentioned that my mom and dad never had a bank account. They never had credit cards, never had debit cards. They just—they used cash only. And it was because they had this fear, I think, that they would do something wrong or that having a credit card was bad. It was automatically going to be debt, right? And so, because of that, it was very difficult for my parents to ever be able to get access

to loans or to be able to, you know, take on any kind of debt, whether it be, you know, people would call it bad debt or good debt or whatever type of debt. They never really had a chance to do that. And I think about that now, and I'm like, well, the biggest reason why I've been able to advance, you know, move and kind of have access to social mobility is because I was able to borrow money and use it in a smart and savvy way to make certain financial moves that have helped me to position myself better. So, I do think that learning that history is going to help us get the information that

we need to then be able to thrive financially now, you know, given all of the technological advancements apps now where you can invest and all of these things that help you monitor your credit score. But if you don't have that context, you might miss some of the nuance in terms of the important components of what you should be doing with your money. It's interesting too, to think about how our financial evolution has come, you know, I mean, women didn't have access to credit in the 1970s and that has changed. And, you know, for, and certainly for different cultures, getting access to, you know, to home loans, things like that have been challenging throughout time. So hopefully the financial history that we're going

toward more toward justice, but knowing the history is important. Oh, it's so important. And, you know, it's interesting, even just with credit, like I know a lot of people will tell me, well, you know, the credit system is inherently, you know, against certain communities, whether that's communities of color or lower income communities. And I kind of, I'm like, you know, I think while you may perceive it to be that way, I think it's very important to actually learn about the history, especially of credit, because as I learned more about it myself, I realized that the intention behind developing a credit system with traditional and non-traditional credit types was actually to move away from bias and personal judgments against people for their skin color or

for their background or for whatever, you know, personality traits they had that you might not have liked before the credit system that we currently have in place. You could just choose to not lend money to someone if you didn't like them. Now you can't do that. Now there's a systematized credit score that was intended to get rid of these, you know, prejudices that were built into a system that was based on whether you like someone or not. And so I think when you learn that, you realize, like, maybe the intention wasn't that, but some of the unintended consequences have been that it affects certain communities negatively, which means that there's room for growth. But that doesn't mean that they were designed to be inherently biased against certain

types of people. And so when I learned that, it kind of helped me to change my perspective and understand that, yes, there's room for growth and improvement, but that doesn't mean that the intention of these systems was to harm certain communities per se. It was actually intended to improve upon how it used to be. So we got to learn all of that. That's why I wanted to make sure to include history in the book as well. Well, you mentioned earlier about the importance of understanding your own brain. Part of being a better saver is learning to kind of train your brain. So how did you learn to shift your mindset to sort of be a benefit to future you rather than present you? Okay. So I got to admit this, this only happened because I was a critical part of

the process for my parents going through their retirement process. My mom actually didn't qualify for the 40 credits for the retirement system in the United States. Currently, the way it is, you have to work for a certain amount of years. You have to get those 40 credits and then you can actually qualify for Social Security benefits from the Social Security administration. But my mom was a stay-at-home mom, you know, with nine kids. It was more expensive for her to get childcare than it was for her to stay home and watch us herself. So, you know, she was that at-home mom, but my dad worked, and he was a sole breadwinner. So, when my dad was in his late 60s, we started all thinking about, you know, he's got to get to his retirement soon because he was

driving a taxi cab for work after many years of working in the restaurant industry. And it was getting to the point where he wasn't able to see as well at night. And it was starting to kind of get unsafe for him to really be on the road. And so, we said, okay, I think it's time, you know, that we're going to start talking about this thing called retirement. But they didn't have anything put aside for retirement. They didn't have investment accounts, right? They've never had even bank accounts. So, when I went online and I went to, you know, ssa.gov, I started to do their application for their Social Security benefits, I recognized, first of all, they couldn't even collect their Social Security benefits because they didn't have bank accounts.

Now, back in the day, they used to mail out checks for your Social Security benefit, right? Now, you can only claim it with a bank account, right? So, through a wire transfer. So, I'm like, oh my goodness, like they can't even get, my dad can't even get the benefits. So, we first had to establish his first bank account, which I helped him do online. And then, once he had his checking account set up and his debit card, then he could get the Social Security benefits direct deposited into his existing bank account. And then my mom applied for supplemental Social Security benefits, which I didn't even know

was a thing, but I learned on the website, doing some research, that if your spouse gets retirement benefits, even if you don't qualify yourself, you could apply for spousal supplemental social security benefits. And so, my mom did that once she turned 63, and she was able to then get half of the benefits that my dad was collecting. So, you know, every little bit helps for them, because they never had 401ks, IRAs, anything for retirement. And they never knew about that, and they never really had access to that through the types of jobs they had as immigrants. So I felt like it was very eye opening for me to go through that process, helping them. And I'm like, oh, my goodness, what about when it's my turn when I'm their age?

Like, I got to I got to start taking action now so that I'm not like in that in that same boat as them, you know, and I don't blame them. I don't think it's their fault. Again, they didn't have access to the education that I've gotten. They didn't have access to the financial tools and accounts that I've had the privilege of opening. But at the same time, I'm not going to continue to repeat the same mistakes. I'm seeing what they've gone through and how it's been so challenging for them in retirement. So I kind of wanted to make sure I prepare my future self to at least have a retirement, retire with dignity, first of all, right, but also have a much easier time and not have to struggle so much and depend on other people to help me navigate this.

I just want to do the best that I can today to prepare my future self to kind of coast a little bit and have less stress in my life at that point. How did you start those conversations with your parents, though? Because talking about money, especially with parents, they're independent, they're proud. How did you get that? And how did you navigate that with eight other brothers and sisters in your life? Oh, yes. It's a tough one because I think the first thing is just recognizing why they're afraid

to talk about these things. And in my case with my parents, I noticed that some older parents, they might be afraid of talking about the idea of death or dying. When you start mentioning retirement, they're just like, oh, you think I'm going to die? You're going to put me in a retirement home. And we're like, no, no, like that's not what this conversation is about. And so the first thing we did was actually meet just the siblings. We didn't include my mom and dad in the conversation.

And I actually arranged this with my siblings a few years before we even knew they were going to start thinking about retirement. And we said, listen, let's do this a few years out so that by the time we get serious about dad retiring, we have put some money aside for them to help them when the benefits that they're collecting doesn't, you know, cut it. So I started actually creating a high-yield savings account, an online account, where my sister, my brother, and I are all account holders on that account. And my siblings Zelle me or Cash App me or Venmo or PayPal. They send money to me, and it goes into that account every month.

And we've been doing that for years before my dad retired. So by the time we had that conversation, we were coming from a place of love. Like, I was coming to my dad saying, listen, we know it's challenging. But we, a couple of years ago, decided to put together the savings fund. We've got some money here to help support you. If you ever can't make the bills, if you're ever short for groceries, if you're ever, you know, get a higher than usual water bill or electric bill, like we have the money to support so that you're not stressed, so that you're not dealing with that.

And coming from that place is so different from, you know, coming to them with questions and judgments and then they feel attacked almost. So I wanted to make sure we didn't come off that way at all. And it was really important for me to do that by establishing some support for them and showing them, listen, we've been putting pooling money together because we care so much about helping you. And then the second thing is I always recommend using someone else's story and feel free to use mine. If you're out there listening, you know, you can tell tell your parents or your uncles and aunts like I listen to a podcast and this girl is talking about how her parents weren't prepared. And I just want to make sure that we are prepared to, you know, using someone else's story as a way to say, like, I just heard someone talking about how there was an unexpected death in the family and they weren't prepared for the funeral costs or they hadn't discussed that person's wishes about how to be buried or where to be buried or, you know, all of these kinds of things. So I feel like if you use someone else as an excuse to say, hey, this is kind of a nudge for me to have this conversation because I want to prevent us from making the mistakes that that person made or that their family experienced.

Let's talk about this now so that we can get ahead of it. Or, you know, just coming from a place of love and positivity of, hey, this is what we want to do for you to help you. This isn't judgmental. This isn't to criticize you. This isn't to say you haven't done enough. That's not the tone at all. And I think people, honestly, my parents were very grateful and relieved to hear that we were actually there to just help and not to judge. How concerned are you about the rise of buy now,

pay later? It seems like that is just grown by leaps and bounds. It has. Is that a concern? And do you think that's a sort of danger sign for some people? You know, I definitely think it's a danger sign for a lot of people, but not everyone. And I think it's similar to the usage of credit cards in the sense that a lot of people will say, don't use credit, don't swipe plastic, Instead, use cash because when you use a plastic card, something psychologically kind of shifts and it doesn't feel like your real money. It feels like there's a distance between you and your cash. So you're more likely to spend more when you swipe plastic cards versus when you use your

own money that you know is coming directly out of your bank account. So there's a bit of a mental shift there, right? It's a psychological aspect. And the same thing is true for Buy Now, Pay Later. One of the Buy Now, Pay Later services, Affirm, they actually had an interview with a journalist from SF Gate, and I had a chance to talk to him. His name is Joshua Bote, and he was awesome. He's Gen Z, so definitely interested in the buy now, pay later trend. And what he found was that the Affirm rep told him that the average shopping cart of the person who uses these buy now,

pay later services is about $360 plus. But the average shopping cart of someone not using buy now, pay later is about $100. So because you are using a service that makes it appear to be much cheaper in the moment, you are more likely to overspend and up to almost four times more. I mean, 3.6 times more money that you would be willing to spend in this instant because you feel like you're committing to less upfront. So by, by splitting your payment into four equal parts, you're seeing the one payment that you're going to make today. And in that instant, you're making a decision with limited amount of data. So people don't think about that number times four. They just think about today, this is what I have to pay. And so they're more willing

to spend up to four times as much money because it doesn't feel like this is a commitment I'm making right now to give all of this money. So I do think that is a red flag for so many young shoppers who, again, aren't tracking their spending. They're not keeping a detailed budget or prioritizing where every dollar is going. And so because of that, it's really easy to fall into the habit of just constantly putting everything on buy and help pay later and breaking things up into smaller payments. But the real reason why it's such a bad thing, if you don't make one of those payments, it hurts your credit score. It can be sent to collections. You get fined with late fees. So even though it's positioned as like an alternative to credit

cards, which is I think why so many young people like it, they're like, oh, it's not going to hurt my credit score. It's not going to be debt. Technically, it could hurt your credit score if it goes the wrong way. And it technically could lead to debt that could go to collections if you don't have the ability to pay it with the funds in your checking account. So it is really important to know that even though they don't market it as a credit product, it still can have a negative impact on your credit score, even though by making your payments, you don't boost your credit score. But if you don't make it, it hurts it. So it's kind of like getting all the negative aspects of the deal without any of the positive ones, specifically when it comes to credit. So I would say, yeah, it's very important to just know yourself.

If you have the discipline and you are tracking your spending and you have a good idea of that long term payment plan and it fits into your spending plan. great. But again, that's not everybody. And especially the younger you are, the less likely you are to be that type of person with your finances. 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. Thanks for watching!