In today's corner, Good shopping or goodbye, Dryden Pence, Chief Investment Officer of Pence Capital Management, discusses navigating stock selection within the semiconductor sector with Julie Hyman of Yahoo Finance. Pence shares his thoughts on why investors should avoid Intel (INTC) and consider adding Taiwan Semiconductor Manufacturing (TSM) to their portfolios.
Pence listed Taiwan Semiconductor Manufacturing as a buy, highlighting the company's position in the world of artificial intelligence (AI). He described Taiwan Semi as producing “very high value” chips, making it the “absolute choke point” in the industry. Pence believes that “no one can accomplish our long-term mission” without relying on Taiwan Semi's capabilities, going so far as to call the company the “most important” player in the field. This gives companies pricing power and the potential for “long-term excess returns.” Additionally, Pence highlighted Taiwan Semi's technological advantages over its competitors, describing the company as an “essential building block” in the future of AI.
In contrast, Pence advises investors to avoid Intel. He said Intel's once-dominant foundry business, which accounted for 61% of the market, had “dramatically declined” as traditional businesses “lost their appeal” and lacked meaningful innovation efforts. It pointed out. Pence said companies are reluctant to “disrupt what's working” because competitors are “years ahead” in terms of innovation, tight supply chains and surging demand. , explained that Intel's market share is declining as a result.
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Disclosure: Dryden Pence personally owns stock in TSMC.
Editor's note: This article was written by angel smith
video transcript
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Julie Hyman: It's a big noisy world of stocks out there. Welcome to “Good Buy or Goodbye”. Our goal is to cut through that noise and help you navigate the best moves for your portfolio. This time, we will delve into the highly competitive semiconductor industry.
So what's the best way to do asset allocation? Meet Dryden Pence, Chief Investment Officer of Pence Capital Management. Thank you for being here. appreciate.
Dryden Pence: absolutely. It's great to be here. Thank you for inviting me.
Julie Hyman: Proceed to purchase now here. And Taiwanese semiconductors have been in the headlines a lot lately, and they are always brought up when semiconductors are talked about. Stocks have performed well over the past year. And in fact, you call it the most important company in the world, which definitely caught my eye in your notes here on the segment. Why is it the most important company in the world?
Dryden Pence: The Formosan cicada has a very important place in everything that happens around AI. If you think about chips, the demand for chips, the demand for data, in 2025 will be five times what it was in 2019. In fact, he makes 90% of the really valuable chips and really important chips. Written by Semi Taiwan.
In other words, those are absolutely difficult points. This is equivalent to 30% of AMD and NVIDIA's cost of sales. So they're absolutely essential to everything that's going to happen with AI and chips in the future.
Julie Hyman: Yeah. Also, as you also point out, when you're talking about cutting-edge chips, the market share is pretty huge. And just to be clear for viewers who aren't familiar, we always talk about semiconductor companies, so Taiwan is a so-called foundry. In other words, they actually physically manufacture chips designed by other companies.
Dryden Pence: that's right. And because they are, and because they are that foundry, they just absolutely call it a choke point, right? No one can accomplish their long-term mission without utilizing Taiwanese cicadas. So it gives them pricing power, and that pricing power translates into long-term excess returns. This is one reason why we like this stock for the short term, long term, and to the end.
Julie Hyman: interesting. And his 90% market share is amazing. And finally, similarly, you say your technology is much more advanced than your competitors. Because while there are certainly other companies working on this business, they are not as large.
Dryden Pence: that's right. And they can. Taiwan Cicada has the unique ability to build on its success and maintain its leadership in this field. So they're not just working on processes, they're not just working on where they are, they're working on technology. And they are fully integrated into all other major companies. No one can really do business without Taiwanese cicadas.
So as things improve, we even remember Moore's Law. So if you think of this as a foundry, I think it's an absolutely essential building block for the future of AI.
Julie Hyman: interesting. Now, as always, I want to talk about what could be a potential risk. And last week, there was a little update to this conversation. You just said that risk is a geopolitical issue. Naturally, an earthquake occurred in Taiwan, but fortunately it appears that there was no damage to production capacity. However, I was reminded once again of the idea that we are highly dependent on this company and its operations in Taiwan.
Dryden Pence: Well, it's a geographic risk. It's a geopolitical risk. I think they are trying to move their production base out of Taiwan in order to diversify globally. It would certainly help with earthquakes, but it would also help situations with the risk of a China conflict.
So I think when you look at how they do this, they can take the capital and deploy it around the world and bring the technology to various other places. In short, we have learned from COVID-19 why it is important to make supply chains more localized rather than completely globalized. So when it comes to Taiwan Semi, the key is to move production outside of Taiwan to other parts of the world to ameliorate that particular risk and put us in a situation where we don't have the same constraints, even starvation. I think. Illness, coronavirus, earthquake, whatever it is.
Julie Hyman: What do you have? Now, before we move on to the stocks you avoid, do you have a position in TSMC?
Dryden Pence: Yes, it is.
Julie Hyman: got it.
Dryden Pence: Yes, we do that, and so do many of our clients.
Julie Hyman: Okay, I get it. Now let's move on to a stock I hate that is trying to compete with Taiwan Semi: Intel. And as you know, the stock price has been a little volatile, especially recently. First of all, there's the legacy business.
Dryden Pence: right. And if you look at a company that has, in some sense, lost its mojo, it's Intel. And the problem they have is that they've been too dominant for a really long time. I think they just got lazy. Maybe they haven't innovated enough.
But whatever it is, they are losing market share to the Taiwanese Semi. They are losing market share to their peers. And they haven't been able to keep up with innovation, which I think is really important.
Let's look at companies that lose their ability to innovate over time. In other words, companies such as IBM are extremely dominant at one point, but then become less effective. In that sense, we are worried about Intel. They will have to work really hard to reaffirm themselves.
Julie Hyman: Well, you could argue that IBM is back again, but it probably will be back at some point. And one of the ways Intel is trying to do that is by building out a foundry business, basically establishing its own manufacturing capabilities to compete more directly with the likes of Taiwan Semi. The goal is to make it possible.
Dryden Pence: that's right. And I think they had 61% of the market at one point. But now it has decreased dramatically, right?
Therefore, going forward we need to redeploy and work directly to increase the foundry's capabilities. They are trying to compete with the Taiwanese cicada, but the Taiwanese cicada is many years ahead of them. So when you are, we not only see it as something to be avoided in itself, but we certainly see it as something to be avoided in contrast and comparison with other players. Because they are actually years ahead of them.
Julie Hyman: And as you pointed out, Intel released an update with some numbers on the foundry business that disappointed the market.
Dryden Pence: Yes, they are losing money. So, the short answer is, we're going to invest a lot of money into this, and we're losing money, and we're not really keeping up. I think that's one of the big things. This means losses in this sector have ballooned to up to $7 billion. So you have to be careful with this and that's one of the reasons it's on the avoid list.
Julie Hyman: Yeah. And finally, another point of contrast with Taiwan Semi is its advantage with large industry customers and its technological advantages that you pointed out.
Dryden Pence: that's right. If you look at Qualcomm, AMD, Broadcom, all the other companies, I think his 30%, 40% of his cost of goods sold is accounted for by his TSMC. And we see Intel trying to move into that.
The problem is that supply chains are so tight and demand is so high that people don't want to disrupt what's working well. Therefore, it will be very difficult for Intel to return to these systems. And I think they're going to have a tough road ahead of them. But that doesn't mean they can't do it, right? Maybe you can, but I don't think so. I don't think he will catch up with companies like TSMC anytime soon.
Julie Hyman: Gotcha. And I think the last point is some sort of downside risk. What would work? Well, that might work, the foundry–
Dryden Pence: It might work.
Julie Hyman: –If you put in the effort, you might succeed faster than some investors. [INAUDIBLE].
Dryden Pence: Most importantly, we mentioned earlier how we see data demand increasing fivefold between 2019 and 2025. So there's more data demand and more chip demand in AI and everything else. It's in everything. In other words, electric toothbrushes have chips in them.
And what works for them is that there's this huge demand and they're probably in second, third, fourth place. However, if demand is high, you can make a profit even if you are in 2nd, 3rd, or 4th place. So I think it might work in this scenario —
Julie Hyman: Gotcha
Dryden Pence: –Is it just you?– TSMC can't keep up and neither can anyone else, so it's enough to go all over the place. So their business will do well.
Julie Hyman: It's not zero sum —
Dryden Pence: that's right.
Julie Hyman: –In other words, it's a game.
Dryden Pence: It's a pie that keeps expanding.
Julie Hyman: Yeah. What is your position within Intel?
Dryden Pence: Very, very minor. Very, very minor.
Julie Hyman: Okay, I get it.
Dryden Pence: Only legacy positions held for tax reasons.
Julie Hyman: Well, let me summarize what I'm telling you here. Basically, you say you're going to buy Taiwan Semiconductor because Taiwan Semiconductor is a key pain point in AI, so the most important company in the world is technologically years ahead of its competitors. and monopolize market share. On the other hand, you said that Intel should be avoided. The technological superiority has been lost and the foundry sector has not yet reached a sufficient level.
thanks so much. Thank you, Dryden.
Dryden Pence: absolutely. thank you.
Julie Hyman: And thank you for visiting “Good Buy or Goodbye”. You can watch episodes here three times a week at 3:30pm ET.
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