Investment Thesis - Semiconductors

Semiconductors are computer chips, such as graphic processing units or central processing units, that are at the heart of the electronic devices we use everyday. Semiconductors are key to graphics processing, machine learning, and computing in general. The market for semiconductors includes smartphones, personal computers, gaming hardware, self-driving cars, cloud-based services and more. 

Digitization

Much of the growth we’ve seen in the electronics industry is a result of the increasing performance and decreasing cost of semiconductors over the past few decades. Better semiconductors have allowed companies to develop electronic products that are smaller and more powerful at lower costs.

As digitization takes over the globe and we become increasingly dependent on technology, demand for semiconductors tends to grow. This trend has been accentuated by the Covid-19 pandemic. 

With people working from home and spending more time indoors, demand for personal computers and gaming consoles has grown. There has also never been higher demand for data centers due to the increasing adoption of cloud-based services, streaming media, virtual private networks (VPNs), and online gaming.  

Moreover, digital transformation that was expected to take years has been compressed into a matter of days and weeks. Entire industries are being reset, and digital infrastructure is front and center in the transition.

Machine Learning

Natural Language Processing, Autonomous Driving, and Recommendation Engines are just some emerging developments that may significantly increase the demand for semiconductors over the next decades thanks to Deep Learning.

Deep Learning Algorithms pour vast quantities of data through neural networks, training them to perform tasks with increasing accuracy. This is typically done by using GPUs to leverage parallel computing. As explained by Nvidia

“Architecturally, the CPU is composed of just a few cores with lots of cache memory that can handle a few software threads at a time. In contrast, a GPU is composed of hundreds of cores that can handle thousands of threads simultaneously”.

This kind of technology has such enormous potential to exponentially accelerate human productivity that PwC expects the market for AI-related semiconductors to grow from US$ 6 billion in revenues in 2019 to more than US$ 30 billion by 2022, a compound annual growth rate of almost 50%.

US-China Trade War

The Covid-19 pandemic and the US-China trade war have disrupted supply chains over the past year. As a result, semiconductor companies have become more interested in achieving end-to-end design and manufacturing capabilities for leading-edge technology.

Reducing dependence on China isn’t easy and may put companies at risk, though. Yahoo News explains:

“For most semiconductor companies, China is both a consumer and a supplier. China consumes about 50% of all semiconductors made worldwide. Furthermore, many U.S. technology companies either have manufacturing plants in China or use Chinese companies in their supply chains”.

In this scenario, companies like Nvidia have chosen to concentrate their manufacturing in countries other than China, such as Taiwan. Still, no region has end-to-end capabilities for semiconductor design and manufacturing.