THE SEMICONDUCTOR INDUSTRY GRABBED headlines in 2021 mostly due to a supply shortage that crippled industries, such as autos, for which chips are a key component. The world awoke to the fact that seemingly everything these days—from garage-door openers to rockets—runs on what’s now dubbed “the new oil.”
The acute supply-demand imbalance, induced largely by pandemic disruptions, should ease as we move through 2022. But the insatiable appetite for semiconductors will continue to surge. Angelo Zino, an analyst for investment research firm CFRA, foresees a “super cycle” for the industry over the next decade as the content per device and sophistication of semiconductors grow. For example, artificial intelligence capabilities, which essentially replace the human brain and require high-performance chips, are expanding in industries ranging from autos to medicine to data centers.
Devices are getting smarter. Applied Materials, the largest equipment supplier to the semiconductor industry, projects that between 2020 and 2025, the value of semiconductor content will jump 50% per automobile, to $690, and it will double for an average data center server, to $5,600. The growing adoption of 5G telecommunications will help boost the value of chip content of a high-end smartphone to $275. Overall, the industry should expand by 2.5 to 3 times the rate of gross domestic product growth and become a $1 trillion market in 2030.
With this inexorable growth in mind, we identified six attractive stocks that range from chip designers to manufacturers to equipment suppliers. Valuations in the industry aren’t cheap, but they have come down in recent weeks along with those of the tech sector overall, hit by the recent run-up in interest rates. Returns and other data are through January 7.
Semiconductor manufacturing is an enormously capital-intensive business, with foundries and logic- and memory chip companies spending tens of billions of dollars each year to expand capacity and to keep up with the blazing pace of technological change. Applied Materials is the world’s largest maker of semiconductor equipment, an industry niche that has consolidated in recent years to just five major players. Igor Tishin, a tech analyst at Harding Loevner Funds, likens the leading tool makers to “arms suppliers to a growth industry.” That’s because regardless which chipmaker is up or down, all of them need to buy from the same handful of equipment suppliers.
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