Semiconductors, also known as integrated circuits, microchips or chips, are a part of our everyday lives. Whether you’re reading this article on a smartphone, laptop, tablet or PC, semiconductors are involved. Because of their wide use, semiconductors present many investment opportunities, especially now that new artificial intelligence (AI) technology, such as ChatGPT, heavily relies on them. We highlight these at the end of the article, but first, we give you some background about semiconductors and the chip industry.
What are semiconductors?
Semiconductors are materials that possess electrical properties in between those of conductors (e.g., copper) and insulators (e.g., rubber) and are used to control electrical currents. Semiconductor devices can be used to amplify signals, switch and convert energy.
The most common semiconductor material is silicon. Silicon Valley, the epicenter of innovative technology companies in the US, got its name from the number of semiconductor and computer-related companies in the area.
While they are tiny in size, they are the brains of modern electrical devices. For example, smartphones, laptops, computers, televisions, appliances, LED bulbs, gaming consoles, medical equipment and cars all rely on semiconductors to function. An automobile alone has around 100 chips, powering braking systems, steering, displays and touchscreens, airbags, air conditioning, windshield wipers, electric windows, etc.
The semiconductor industry explained
The semiconductor industry is highly competitive, with a handful of companies dominating. Chip plants cost billions to build and equip, and large budgets for research and development are required to continuously improve products, making them smaller, cheaper and faster.
Some companies are involved in the production process from start to finish. However, others outsource some of the process, such as design or testing. Companies centered around manufacturing semiconductors are called foundries, for example, Taiwan Semiconductor Manufacturing Company (TSMC).
Profit margins, in this case, are slim, and companies need to run 24/7 to make a return on their investment. They also have to sustain yields (the number of working chips per batch) of 80-90% to be competitive, which takes years of experience to achieve. The process is also quite lengthy, taking up to 26 weeks to manufacture a chip for a consumer.
The semiconductor industry is highly cyclical, responsive to supply and demand fundamentals. When times are good, demand for chip products increases and chipmakers have trouble keeping up with demand, and prices may increase. On the other hand, when conditions are less favourable, there can be an oversupply, and prices may fall.
Are semiconductors a good investment in 2023?
No one can predict stock prices. There’s always risk involved. As mentioned, the semiconductor industry is cyclical. And it can be quite volatile at times. On the other hand, there is a lot of potential in this sector due to its widespread use and technological developments that will continue relying on chips. So, whether they’re a good investment depends on your situation and risk tolerance as an investor.
Looking back at the past couple of years, the semiconductor industry was booming in 2020 and 2021, driven by a surge in consumer and corporate investments in technology. There was even a chip shortage during this time because production couldn’t keep up with demand. However, 2022 was rough for chip stocks for many reasons, including increasing geopolitical tensions, rising interest rates and high inflation. This resulted in excess inventories and lower consumer confidence. Some of these issues have rolled into 2023.
The good news is that many analysts and financial firms, including JP Morgan and Allianz Global Investors, believe semiconductors could make a comeback in 2023. Those betting on chip companies understand that there will be challenges for the industry in the near future but believe that data centres and automotive semiconductors will drive growth going forward. Chip stocks have also gained this year due to interest in AI and ChatGPT propelling semiconductor demand and data-centre spending. So far this year, the iShares MSCI Global Semiconductors UCITS ETF (IE000I8KRLL9) is outperforming the S&P 500 and EURO STOXX 50. Time will tell if the semiconductor stocks that are on the rise will continue in an upward direction, but they still have ways to go from reaching 2021 highs.
What stocks are in the chip industry?
There are many semiconductor companies all over the world. Here are the five biggest by market cap as of April 2023:
Nvidia is a leader in the semiconductor industry and has greatly benefitted from the AI craze as its products are used to power chatbots and other technology. Since the beginning of the year, Nvidia’s stock price has nearly doubled. It was also the biggest winner of the S&P 500 and Nasdaq 100 in Q1 2023 and moved up to the top five weighting of the S&P 500 for the first time.
One of Taiwan’s largest companies TSMC was the world’s first dedicated semiconductor foundry. If you’ve never heard of the company, it is one of Apple’s biggest suppliers of chips. TSMC has been hit by the semiconductor slump and recently forecasted sales to plunge by 16% in Q2 2023. However, the company expects inventory levels to rebalance to a healthier level in Q3 2023.
Unlike some companies that only focus on semiconductors, Samsung makes loads of different electronic products. While their products line is diversified, semiconductors are still a massive stream of revenue, and the company is feeling the impact of the chip slump. Samsung announced that its estimated profit in Q1 2023 was the lowest profit for any quarter in 14 years. As a result, Samsung said it would lower the production of its memory chips by a meaningful level.
Broadcom is another heavy hitter in the semiconductor industry. Its semiconductor products are widely used, for example, for wireless, cyber security and storage solutions. As developments in AI are becoming more advanced, so are the chips needed to power this technology. Broadcom has recently released a new product specifically designed for AI, which will compete with Nvidia. Broadcom’s stock price hasn’t skyrocketed like Nvidia’s, but it has seen sizable gains since the beginning of the year.
Dutch ASML designs and produces the lithography machines necessary to produce semiconductors. This means it doesn’t actually make chips but gives companies like TSMC and Samsung the tools to mass-produce their products. ASML’s Q1 2023 results beat analysts’ forecasts. However, its quarterly orders were at the lowest level since 2020, sparking concern among investors.
- The semiconductor industry is cyclical and highly competitive, with a handful of companies dominating the space.
- Demand for semiconductors was booming in 2020 and 2021 but began to drop in 2022 and into 2023.
- Some chip stocks, like Nvidia, have seen boosts in their stock prices thanks to the AI craze. Others are still struggling due to the current economic conditions resulting in oversupply.
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The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Please be aware that facts may have changed since the article was originally written. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.
Sources: Financial Times, Bloomberg, Reuters, The Washington Post, Harvard Business Review, South China Morning Post, Investopedia, Investor’s Business Daily, Barron’s, Forbes, Volkswagen, Intel, Semiconductor Industry Association, AMD, Japan Times, TSMC