Telecom infrastructure and chip equipment capex both look strong right now. And new spending bills being mulled by Washington could make them stronger still.
On Monday night, reports emerged that the Trump Administration is prepping a roughly $1 trillion infrastructure bill that -- although reserving most of its funds for things like roads and bridges -- would also allocate some money towards 5G infrastructure and rural broadband investments.
And last week, in news that got a little less attention, several Republican and Democratic Senators introduced the CHIPS for America Act, which aims to boost U.S. spending on chip manufacturing plants (fabs). Among other things, the bill calls for a 40% investment tax credit (ITC) on chip equipment purchases through 2024 (smaller credits would exist for 2025 and 2026), a $10 billion federal match program for state and local incentives related to the building of advanced chip fabs, and billions in new government semiconductor R&D spending.
The CHIPS for America Act is being floated a month after Taiwan Semiconductor (TSM) announced that it will build an Arizona fab capable of making a relatively modest 20,000 wafers per month, with construction starting in 2021 and production starting in 2024. TSMC says it will spend $12 billion on the fab (inclusive of both capex and other spending) from 2021 to 2029.
Should an infrastructure bill allocating some funds to 5G and rural broadband get signed, it would boost U.S. telecom capex at a time when many carriers are already upping their investments in response to the network traffic spikes that they've seen since COVID-19 lockdowns took effect in March.
Last month, Cisco Systems (CSCO) reported that product orders from service providers in the Americas rose by a mid-single digit percentage in its April quarter, after having dropped 8% during its January quarter. And during a recent conference talk, Nokia CFO Kristian Pullola indicated that his company's customers have seen 40% wireline traffic growth and 20% mobile traffic growth thanks to COVID-19, while forecasting that many clients that have underinvested in wireline networks in recent years will now step up their spending.
Also, chip suppliers such as II-VI (IIVI) , Inphi (IPHI) and Broadcom (AVGO) have indicated that they're seeing strong demand from telecom equipment OEMs. Last month, II-VI said it heard from an unnamed OEM that "U.S. [network] traffic increased in the first week of the nationwide shelter-in-place orders by more than the increase for the entire prior year."
Chip equipment demand, meanwhile, continues to benefit from Intel (INTC) and TSMC's elevated capital spending. Also, chip equipment makers such as Applied Materials (AMAT) and Lam Research (LRCX) have reported seeing some recent improvement in orders from memory makers following major 2019 spending cuts, while suggesting that (provided industry conditions are favorable) demand could improve further during the back half of the year, particularly for NAND flash memory capex.
There are still clearly a lot of unknowns right now for both the CHIPS for America Act and the Trump Administration's infrastructure bill, including of course whether they'll be passed. But there does seem to be a lot of interest on both sides of the aisle right now in spending more on a wide variety of infrastructure (and providing the economy with a boost in the process), and a number of tech hardware, chip and component suppliers should benefit if that interest yields tangible results.
