This Industry Heavyweight Is Poised to Lead the Charge in Domestic Chipmaking

Chipmaking is coming home...

Over the past two years, semiconductor supply has been a hot topic. As the world hunkered down during early-pandemic lockdowns, chipmakers focused on producing high-demand products like electronics and remote connectivity equipment.

The shift meant that things like automobiles were left behind. At the time, this wasn't an issue as automakers slashed production because of the lockdowns. But once things started to return to normal, it became a big problem.

Auto production came roaring back in the latter half of 2020 (and the entirety of 2021) – when chipmakers were still swamped with orders from electronics, networking, and remote connectivity clients. So demand overwhelmed these semiconductor companies – while supply remained tight.

To further complicate matters, most of the world's chips come from one region: Taiwan. This makes the entire semiconductor supply chain extremely vulnerable to geopolitical tensions or any Taiwanese-specific issues.

But the U.S. government is working hard to fix this...

Last month, the Senate passed an updated version of the U.S. Innovation and Competition Act ("USICA"). The bill includes $52 billion in grants and subsidies for domestic chip production. The House of Representatives has a similar plan that sets aside more than $50 billion for domestic chip production.

Essentially, the government will give chipmakers more than $50 billion to subsidize new manufacturing facilities here in the U.S. That would cut down our reliance on Taiwan, China, and other countries.

Today's company is striving to position itself at the forefront of domestic chipmaking...

Intel (Nasdaq: INTC) is one of the largest semiconductor makers in the world. It's a one-stop shop for design, manufacturing, and sales. It invents new circuitry and also invests heavily in the materials science and physics of silicon manufacturing.

Under CEO Pat Gelsinger, Intel has begun making massive investments in new chip capacity to make up ground on its competitors. You see, Gelsinger wants Intel to become the top "foundry" business out there. Put simply, a foundry company is one that physically manufactures the chips that other semiconductor companies design.

Here in the U.S., those investments include up to $100 billion toward new manufacturing plants in Arizona and Ohio. In Europe, Intel plans to invest more than $80 billion in manufacturing and research and development – starting with a $36 billion plant in Germany.

Intel already has some big-name companies signed up for its chipmaking, with agreements to make chips for Qualcomm (QCOM), as well as data-center chips for Amazon Web Services. And it's in talks to add another huge customer...

A recent report from Reuters suggested that Nvidia (NVDA) is interested in partnering with Intel. That would add another major customer to Intel's ranks – boosting its chip manufacturing even more.

And Intel isn't just investing in its own manufacturing. It also just made a huge chip acquisition...

In February, Intel bought Tower Semiconductor (TSEM) in a $5.4 billion deal. Specifically, adding Tower Semiconductor will help Intel become a stronger foundry candidate. According to data from Bloomberg, Tower Semiconductor makes chips for semiconductor giants Analog Devices (ADI) and Broadcom (AVGO), among others.

So the deal will instantly expand Intel's foundry business with established customers in the semiconductor space – boosting Intel's business. But don't expect this to be the end of Intel's expansion...

In the short term, all of these investments will be a headwind to Intel's cash flows. In a recent earnings press release, Intel said it expects capital expenditures of $27 billion this year, up from $20 billion in 2021.

And it said that it would run at a free cash flow ("FCF") deficit of $1 billion to $2 billion, down from 2021's positive FCF of more than $11 billion. According to data from FactSet, that would be Intel's first year of negative FCF since at least 1986 (the earliest data available).

But this increased spending is all part of a plan to boost Intel in the long term. In the end, these investments should make Intel the go-to chipmaker for other companies that need semiconductors. And that should push shares higher.

Sometimes investing is simple.