As the U.S. Pulls Chip Making Back Home, the Toolmakers Win First

As the U.S. pushes to bring chipmaking home, billions are flowing into new factories, creating massive demand for tools to bring new fabs online. Taiwan Semiconductor Manufacturing (NYSE: TSM), for example, added $100 billion to its Arizona plans in July, bringing its planned U.S. investment to $265 billion. Micron Technology (NASDAQ: MU) raised its own U.S. spending plan to more than $250 billion through 2035 that same month.

That means tool orders can arrive before a new fab reaches full production. Beyond TSMC and Micron, other companies stand to benefit, including Intel (NASDAQ: INTC), ASML Holding (NASDAQ: ASML), Applied Materials (NASDAQ: AMAT), and Qualcomm (NASDAQ: QCOM).

For investors, the question now is: Who gets paid first, the companies that build the tools, or the ones that run the factories? Intel is a good place to start.

Image source: Getty Images.

Intel faces a key turnaround test

With both chip design and manufacturing under one roof, Intel has direct exposure to U.S. efforts to expand local production. Its foundry business could also attract customers seeking alternatives to established manufacturers.

While toolmakers are paid first when fabs are built, Intel sits in the middle of the chain, generating revenue only after it starts shipping chips to device manufacturers. The challenge is execution. Intel must improve manufacturing performance, attract outside customers, and sell enough chips to justify its spending.

That said, another company supplies the tools Intel needs, allowing it to benefit even before production begins.

ASML: the tollbooth for advanced chipmaking

Advanced lithography machines from ASML help chipmakers print complex circuit patterns. As a result, ASML is an early beneficiary when Intel, TSMC, or other manufacturers expand capacity.

However, ASML's growth still depends on customers following through on spending plans. Export restrictions and geopolitical tensions around Taiwan could disrupt sales. With the stock trading at a premium valuation -- a price-to-earnings (P/E) above 40 -- it leaves investors vulnerable if expected growth disappoints.

More ways to capture equipment spending at Applied Materials

Meanwhile, a fellow toolmaker can capture more spending by selling a wider range of equipment. Applied Materials supplies equipment and services used to manufacture chips. Its broad portfolio has exposure to logic chips, memory, and other semiconductor components.

Whether Intel or TSMC expands production, equipment spending creates more business for the company, giving it several ways to benefit. However, delayed projects, export controls, and competition can weaken orders and revenue growth.

TSMC: a proven chipmaker for outsourced production

Once that equipment ships, a contract manufacturer uses it to create advanced chips. As a foundry, TSMC manufactures chips for customers that outsource production, including those that design advanced AI chips. Its established customer relationships and manufacturing capacity position it to benefit from growing AI demand.

Like Intel, TSMC sits in the middle of the supply chain, using the equipment supplied by toolmakers to manufacture chips. Geopolitical tensions around Taiwan create significant operational risk, while U.S. expansion can be more expensive than expansion in Taiwan.

Micron's memory fabs come with high upfront costs

Meanwhile, a memory maker offers exposure to a different part of the AI supply chain. Equipment from the toolmakers helps Micron Technology produce the DRAM and NAND memory used in computers and smartphones. Demand for high bandwidth memory can support added capacity.

The catch is cyclicality. If supply grows faster than demand, memory prices and profits can fall sharply. Micron must also fund costly manufacturing upgrades while competing against other large memory producers.

A fabless model lets Qualcomm skip building its own fabs

Still, one company offers a way to invest in the chip boom without owning the factories. Qualcomm designs processors and connectivity technology for smartphones and connected devices. Its fabless model allows it to outsource manufacturing rather than funding its own factories.

The company sits toward the end of the supply chain, serving as a customer of TSMC. Its growth depends on chip demand and product competitiveness. But smartphone weakness and competition remain key risks.

Who gets paid first when new fabs open?

The six companies sit at different points in the supply chain, and some get paid sooner than others. ASML and Applied Materials sit nearest the top of the supply chain. Their equipment is needed before new fabs can produce chips at scale, allowing them to get paid before everyone else.

Fab operators come next, but with caveats. TSMC faces Taiwan tensions and higher U.S. costs, Intel has to prove it can execute, and Micron's profits can swing with the memory cycle. Qualcomm gets paid last, since it depends on chip demand from smartphone makers. Investors who can accept the caveats might consider the fab operators.

Overall, as the U.S. builds more fabs at home, toolmakers appear to be the early beneficiaries.

Rick Orford has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Applied Materials, Intel, Micron Technology, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.