The Chip Shop
The world we live in today is very much different from that of two decades ago. Tech has evolved the way we as humans now interact, socialise and live. With such advancements, we crave more and more improvements in connectivity, efficiency, and productivity. To quell such demand tech advancements and heavy spending in R&D has been enormous.
The S&P500 is an index, a collection of the 500 largest companies on the stock market. The long-term trend of the S&P becoming dominated by tech is shown clearly in the table, however, the virus has accelerated such a move. Currently, the five biggest tech companies now make up 17.5% of the S&P 500. (1)
We have seen the virus exaggerate future social conditions. With the isolation and quarantine periods giving us a glimpse of the personal socially retractive society, we have been moving towards. Hence, we have seen the rise of social media apps, contactless payments and other forms of quarantine conducive products and companies.
What Is a Semi-Conductor?
This is where semiconductors colloquially phrased Chips come into it all. The very foundation of active tech hardware requires chips to function. Anything that is computerized is reliant on chips.
Today, most semiconductor chips are created with silicon. Hence, the expressions like “Silicon Valley”, silicon is the heart of any electronic device. (3)
Chips in layman terms are the brain of a computerised system which processes the information that a user requests. Thus, being in a convex tech society, the applications for Chips are ever-growing and wide-spreading. Industries that use Semi-conductors range from High-performance computing to Healthcare. Such a wide array of applications solidifies the growth of the chip industry, as it is a supplier and complementary product to any technological advancement or implementation.
As stated, Chips are fundamental to the devices we use, thus as our usage of tech increases and becomes ingrained into everyday life, Chips role in society will in tandem increase. Here, I look at a few of the industries in which chips are pivotal and are big revenue drivers for Chip companies:
Transport – Electric Vehicles
The Electric vehicles industry is a topic at the forefront of ESG. Developed economies are encouraging the adaptation of e-vehicles through R&D subsidies, and disincentivising diesel cars and other non-electric vehicles through taxation.
If infrastructure such as charging ports are built, and e-vehicles are made affordable, the growth potential of the industry is massive. This can be seen already with the rise of Tesla, who not only has extensive brand recognition, but their intensive innovation looks to soon bring an affordable e-vehicle to market.
Chips are needed for e-vehicles but also pivotal in autonomous vehicles – a hot topic. Chips can constantly collect vital data for building a robust autonomous driving training library. Safe self-driving cars require massive amounts of collected and organised data. Hence, the tech implementation of vehicles brings a rise in Chip demand. (4)
The gaming industry is a growing space and a consistent revenue stream for chipmakers. A fruitful industry with constant advancements in gaming consoles and games to play. Such growth looks to continue, with 75% of Americans having at least one video games console player in their house, a growing number. (5)
Chip Makers exposure in the gaming industry is multi-faceted. Chipmakers provide processors for games consoles, but they also provide graphics cards. Graphics cards are used for gaming computers, in which those who wish to play PC games can get the highest quality and faster speeds. This is a big revenue stream for chip makers, with the rise of games like Fortnite and the emergence of competitive gaming. Spending on PC Gaming machines is expected to increase by $45 billion over the next 3 years. Thus, with chips such a vital part of their construction, it suggests a parallel rise in graphics cards demand. (6)
A data centre is a building used to house computer systems and associated components, such as telecommunications and storage systems.
Chips are required for supercomputing, allowing for accelerated workloads in data centres. Powering efficiency in the machine and deep learning, AI, data analytics and security – all of which are relevant and key themes in today’s market. Information edges, using data to advance and gain competitive advantages, and with machine learning having multiple applications in a vast array of industries. Moreover, data security has been a key topic seen with Facebook and Cambridge Analytica melodrama.
As you can imagine storing and processing so much information requires a lot of processing power, hence Chip makers supply their products to these centres in an abundance, a highly profitable segment for chipmakers.
The Industry Dynamics
Chips are very difficult to manufacture, as they require complex manufacturing processes and high levels of industry talent. This talent is focused largely in Taiwan, South Korea, and the USA. Hence, China is highly reliant on the US for chips for their technological products. Trump has used this as a weapon in the US-China trade war. He has stopped Chips being exported to China, and thus China has had to halt its mobile device productions due to not having the vital chip component.
The Industry also has very high barriers to entry, with such rampant innovation chip makers burn through cash extensively, hence start-up costs could touch billions of dollars. Furthermore, Moore’s Law is the observation that the size of a chip can be halved every year, based on a historical trend. So for context, by the time you set up a company and make your first chip, the size of other market leaders chips would not only be smaller but more advanced due to the momentum of intensive R&D from competitors. But no way is the market a zero-sum game, chip-making is a growing industry and a market which rewards those who innovate.
Looking more specifically at the companies within the industry. The big players and most well-known are Intel, AMD, and NVIDIA. Intel failed to innovate and got complacent as the market leader, this allowed NVIDIA and AMD to eat up market share. Now, Intel is considering shutting down its chip-making division, and its hardware chief has recently resigned.
Nvidia is one of the fastest-growing companies in the Chip space. With market-leading brand loyalty and recognition in the AI and gaming space. NVIDIA has a new gaming chip coming out next month. There is big anticipation surrounding this as the “3000 series” is twice as powerful as their current graphics card. Such releases often act as a catalyst to them beating their earnings estimates and ultimately pushing up their share price.
AMD supplies Chips for both Xbox and PlayStation, with both coming out with new products in the winter suggesting a heavy catalyst for great Q3/Q4 earnings. AMD is somewhat in Nvidia’s shadow but is slowly emerging as a dominant player. Their growth is predominantly due to their CEO Lisa Su, the very embodiment of transformational leadership. Her R&D focus has allowed the company to flourish. AMD is starting to imitate the success of NVIDIA – hence suggesting their share price will also start to imitate NVIDIA, with AMD’s price rising by 54% off largely unimpressive Q2 earning results, making me very bullish on future earning catalysts.
Intel was once the outright dominant player in the chip industry. However, the curse with being the best and first is a lack of hunger. The company’s inability to continue innovating was their downfall allowing them to lose the market cap and most importantly brand loyalty and recognition to NVIDIA and AMD. Recently, Intel has suffered heavy drops in their share price and a loss of a big deal in which they supplied Apple the chips for their devices. However, Intel’s endeavours in the chip space are far from redundant, but through research, I find AMD and NVIDIA have a nimble like curiosity to push the boundaries and expectations that I fail to see from Intel, sadly this may be a case of a company being too big and too diversified in different industries.
The industry seems a good long-term investment. The index Philadelphia Soxx is composed of companies primarily involved in the Chip industry. I have been watching it for some time, and the index has rallied 64% since the March lows – essentially tech advancement would have to stop to halt the growth of this industry. Its’ applications are boundless, from the automated checkout tills I use to get my Tesco meal deal on the way to University, to the device your reading this article from. Hence, such aggressive trends to tech usage suggest that the Chip industry is yet to reach its full birth.