If the U.S. government takes stake in a company, that doesn't necessarily mean investors should follow suit. It might suggest they need to do more homework than usual before pressing "Buy."
Historically when D.C. invests, the money goes to companies that need a helping hand, though that's not so much the case with some of the government's recent moves. Essentially, Washington props up ailing firms, taking on some associated risk. That might be OK for the government, because it can print more money if it needs to. Investors can't.
Also, direct government investment in companies may create uncertainty for companies getting the funds in terms of how much influence the government might have on their business decisions. Ultimately, that could have an impact on share price.
In August, the Trump administration said the government took a 10% stake in shares of chipmaker Intel (INTC) when they traded at just above $20. The deal converted more than $11 billion in federal grants and other funding into a 9.9% stake in the company. By late September, the government had made $4.4 billion on its trade, according to Barron's, with the share price above $30.
The Intel news came soon after Trump said the government would collect 15% of Nvidia's (NVDA) and Advanced Micro Devices' (AMD) chip revenue from China. The administration also loosened export controls on chip sales to the country. Weeks later, China banned companies there from buying Nvidia's chips, but that's a fluid situation still playing out.
Also, this year the Pentagon bought a $400 million equity stake in rare-earth miner MP Materials (MP), leading to a quick doubling in the share price. And it bought a "golden share" in U.S. Steel (X) as part of a deal allowing Japan's Nippon Steel to buy the company. A golden share means the company must consult the government on big strategic decisions like closing a plant, reducing jobs, or making a big investment. This essentially allows the government to veto decisions it doesn't like.
Commerce Secretary Howard Lutnick said similar deals might be coming, specifically citing defense companies, which may raise more eyebrows.
The government seeks revenue partly to address the budget deficit, and in the case of Nvidia and AMD, to keep U.S. chip companies competitive in the key Chinese market. The U.S. government's investment in MP is supposed to give the United States more leverage in the rare-earth business, which China has dominated with 85% of the world's production, according to Barron's.
Direct stakes in corporations are rare for government
While the U.S. government has supported industries like energy and sometimes propped up banks and automakers in turbulent times, taking a direct stake in corporations is rare, historically. That's why it's hard to map a possible path for companies now embracing the government's support.
"The expanded role of the government in private companies has sparked concerns across the political spectrum, as well as on Wall Street, though it will take some time for the ramifications of this new direction in industrial policy to play out," said Michael Townsend, managing director, legislative and regulatory affairs at Schwab, in a recent look at Washington policy. "It's a potentially big deal that isn't getting enough attention."
When earlier administrations assisted automakers and banks in the early 1980s and during the Great Recession of 2007–2009, the companies receiving support were struggling or even emerging from bankruptcy. Investors who jumped in knew what they were getting into and believed the government's backing lowered their own risk, though there's no avoiding risk in any investment.
This time, it's a lot less clear if the semiconductor or defense industries need this type of largesse. Intel has struggled for a while, but few would argue that Nvidia or AMD have major issues in their businesses outside of challenges in China reflecting trade policy. Both stocks are up sharply over the last few years and compete in the booming AI industry where their customers spend billions of dollars to stay on the cusp of new technology.
Of the three, only Intel might remotely remind investors of car companies and banks more than 15 years ago when those two industries faced existential crises. Intel suffered several quarterly losses recently amid sluggish revenue growth as it struggles to expand its U.S. manufacturing footprint. Even before Trump put the government's money directly into shares, Intel received indirect help from the Biden administration's Chips Act of 2022, which funded domestic semiconductor manufacturing and research.
For investors looking at companies following government deals, it makes a difference how the deals are structured. The 10% investment in Intel is arguably much more involved than what the government did with Nvidia and AMD.
A 15% government share of revenue from the relatively small chip markets Nvidia and AMD have in China isn't likely to move the needle much for those two firms. Still, it's revenue the companies must fork over to the U.S. government and can't return to shareholders through stock buybacks or dividends.
Though the 15% payments are voluntary, some see them as the equivalent of a tax and say it could hurt business for companies involved.
"In effect, the firms will be paying an export tax, though neither they nor the administration describes it this way," wrote Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center at the Urban Institute and a columnist for Forbes. "This export tax, by any name, is a poor idea. It will generate relatively little revenue, fail to protect U.S. security interests, and ultimately make U.S. chipmakers less competitive in world markets."
Pondering possible impact on corporate decision-making
Companies traditionally make decisions to grow their businesses and keep shareholders happy, not necessarily in that order. But when one shareholder is the government, which also regulates the company and sets interest rates (indirectly through government-appointed Federal Reserve policymakers), this traditional metric could become scrambled.
"I think the most relevant concern is the misallocation of capital," said Liz Ann Sonders, chief investment strategist at Schwab, in a recent podcast. "When you have a large shareholder, if not one of the largest shareholders, being the government, who also happens to be the tax authority and the regulator, does that mean companies are now going to make capital decisions, whether it's around labor or capital spending, based on politics versus being there for the benefit of shareholders, customers, and employees?"
Consider the following scenario: Company A gets a 10% investment from the U.S. government, while Company B, a competitor, doesn't. When industry fundamentals weaken, Company B decides to lay off 10% of its workforce to keep expenses down. Company A wants to do the same, but the government—now a stakeholder—sees many companies laying off workers and doesn't want Company A to add to the tally, which has become politically tricky for the administration. It tells Company A's leaders to keep workers on the production lines—rain or shine.
Now, Company A's executives are in a pickle. They can listen to the White House, which would mean keeping workers they don't need and suffering a margin hit versus their competitor. Or the company could ignore the government's wishes, lay off workers, and risk losing Washington's investment money, which would potentially cause the share price to fall.
That's just one of many scenarios that could make investors nervous about dipping a toe into these waters. Another would be if the government makes special deals with foreign trading partners designed to benefit the company it has a stake in, possibly at a disadvantage for that company's competitors. A competitor that sees Company A benefiting in a way it believes is unfair might sue, creating even more uncertainty. Investors could grow hesitant to buy any major firms in the industry amid ideas that fundamentals aren't dictating share prices.
Those are dramatic developments. Less dramatic might be the government demanding a company it invests in to not buy back shares or raise dividends if it doesn't meet requirements the government puts in place. Such a move would potentially hurt the share price.
None of that's happened yet, but investors might want to grapple with all these possible scenarios before following the government's lead into a company's shares.
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© Charles Schwab
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