This Is a Confusing Sector

10/15/2014 12:01 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

There is one tech sector in particular that is especially confusing and MoneyShow's Jim Jubak sheds some light on what is going on in this key sector.

You're excused if you find what's going on among chip-making companies right now really, really confusing. Let me try to de-confuse it, or, at least, explain the confusion. On October 7, we had two stories that indicated really different directions. One came from IBM (IBM) that IBM was again interested in selling the part of the company that makes chips. They wanted to keep the intellectual property but they want to get rid of the factories. In fact, they want to get in there so bad that they're talking about giving the company that buys them a billion or two billion dollars just to take them off their hands. The likely candidate is a company called GlobalFoundries, which has money from, I think it's Abu Dhabi, so they've got a lot of cash. They're trying to build up another industry that's not so dependent on energy, on oil, but, basically, they're quibbling over how much extra property they get and how much the factories might be worth. GlobalFoundries is basically saying they're not worth anything because they're too old. IBM would like to get out of this business—because—and here we get to the second part of the story…

Samsung (SSNLF) , on the same day, announced that it would spend $14.7 billion dollars to build a new chip factory in South Korea and on the surface you go, “Oh, this makes no sense at all. IBM is getting out of the business, paying somebody to get it out the business, so why is Samsung investing?” It goes back to the whole issue of if you don't have an up-to-date chip factory it's not worth very much is what GlobalFoundries is telling IBM.

What we're seeing is, there's not a whole lot of companies in this sector anymore but we're seeing a gradual weeding out of the last few companies and we're getting down to a very, very, very small group that consists of Intel (INTC), Taiwan Semi-Conductor (TSM), and Samsung. This, for all intents and purposes—there are other players—but this is the chip-making industry right now. It's because it's really, really expensive. If you're not doing massive volumes and the only companies that are doing massive volumes are Samsung, Apple, and Intel—to some extent—and Taiwan Semi-Conductor, which does contract manufacturing for everybody. Samsung and Taiwan Semi-Conductor produce chips for Apple. Intel does some contract manufacturing for other people but also is farming out work to Taiwan Semi-Conductor, so basically, you're getting this concentration in the industry because these are the only guys that can afford to build the new factories that will make the new set of chips possible as you go from 20 nanometers down to 18, down to 14; each one of those generations means that you can produce more power for a chip using less electricity, less power in the device, so the phones can last longer. This is where you're going. There are fewer and fewer players. That's why if you're looking at this, I think you might want to take a look at Taiwan Semi-Conductor, one of the last few players, doesn't have the conflict of interest that Intel and Samsung has, and, as there are fewer and fewer companies in this area, I think you're talking about pretty good margins for the survivors.

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