Semiconductors – The engine in Tech
Without microprocessors we would have no technology sector. That makes the manufacturers of these chips important players in the markets.
I have always been a fan of technology because I think there is something fundamentally positive about it. The technology sector is the arena where human imagination and creative power are most clearly allowed to unfold, and where the boundaries of what is possible are constantly being pushed. From day to day you may not notice much, but as the years go by, major changes occur.
Developments in technology are inextricably linked to microprocessors, also called semiconductors or computer chips. These are the "brains" of the computers, and it is the amount and speed of these that determines the data processing power available. Both hardware and software depend on semiconductors, and thus also all services based on the use of such. The development of 5G and other forms of high-speed internet, together with increasingly better and faster microprocessors, will continue to drive development forward. We are still in the infancy of the technological revolution, and increasingly better chips is the main driving force for moving forward.
The value chains for the production of microprocessors are global, but still dominated by a relatively few companies. Those who have spent some time on gaming or PCs are probably familiar with names such as Intel, Nvidia and AMD. Likewise, Apple and Samsung constantly highlight their new microchips and how these enable improvements on new mobile products.
Perhaps less well known among people is that most of the companies have stopped producing their own microprocessors and concentrate their efforts on design and sales. The actual production of increasingly smaller and more powerful microchips has become so expensive and complicated that only a few players manage to be competitive in this field. Intel is one of the US manufacturers that still owns the entire value chain, and they have recently launched plans to significantly expand their capacity. This is largely supported by a political desire in the USA to get more of the microchip production back to the USA after the trend has gone the other way for several decades. As a clear sign of this, President Biden signed "The CHIPS and Science Act" in August this year, which opens up approx. 280 billion USD in support for domestic development and production of microchips. Recently, the USA also introduced sanctions that limit the export of the most advanced microchips. Both industrially and militarily, access to the best microprocessors is essential.
The largest producer in the world per now is however Taiwan Semiconductor Manufacturing Company. Measured in turnover, TSMC accounted for 54% of the world's microchips in 2021, and it is they who produce the advanced chips designed by, among others, Nvidia and Apple. With this fact on the table, it is also easier to understand why control over Taiwan is a subject that the US and China are fighting over. Chips are big politics.
Earlier in November, it was also known that investor legend Warren Buffett's investment company Berkshire Hathaway had bought a $4.1 billion stake in Taiwan Semiconductor. Berkshire have for most of its history stayed away from the technology sector, but in recent years Apple has sailed up the charts and is now their biggest holding. In addition to Apple, Buffet has taken positions in HP and Snowflake in the technology sector, before now also TSMC.
Of the companies further back in the value chain, it is natural to highlight the Dutch giant ASML. It is ASML that makes the extremely advanced machines that are used to produce increasingly smaller and more powerful microchips. Each of these chip printers costs several billion dollars. The factories for the production of microchips are actually the most expensive ever made by mankind. ASML is itself Europe's largest listed technology company in terms of market value. Microchips are also prominent in Norway, with Nordic Semiconductor (NOD) as the most heavily weighted company in the technology sector. NOD is big on Bluetooth chips used in e.g. wireless PC equipment and Apple headphones.
The above-mentioned companies are among the most traded stocks in the international technology sector, and also among those we focus on most in the hedge fund I manage. Microchip shares fluctuate a lot and there is a daily news flow that provides many opportunities to take short-term positions. Vontobel offers trading products on many of these companies, which makes it easy to take positions without having to trade in foreign markets.
In terms of price, 2022 has not been a party for the microchip shares. At the time of writing, the sector index Philadelphia Semiconductor Index SOX has fallen approx. 31% so far this year, while the broader S&P Technology Index is down 24% and the NASDAQ 100 is minus 28.5%. Both Nvidia and AMD are down about 50%, while Intel has fallen 42% since the turn of the year. However, all shares have come up a lot from the lows that were set earlier this autumn. If you look at fundamental numbers, you will also find great breadth. Intel has a Price / Earnings ratios (P/E) of 15 based on the 2022' estimates and a dividend yield of close to 5% but have negative growth on both top and bottom line. AMD is priced at P/E 21 despite strong growth this year, while Nvidia is among the highest priced with P/E 45 on current year estimates. (Source: Infront and S&P).
Who the winner will be going forward is hard to say, and I could easily have mentioned a dozen more stocks that are relevant contestants. However, it is certain that microchips are the engine of the technology sector. Price, capacity, functionality, and availability of data processing are in many ways the setting the terms for other technology companies as well. Keeping informed about what is happening in this area is therefore important, and it offers constant trading opportunities. Chips are not boring. It should also be kept in mind that past performance and estimates are no reliable indicators of future results.
Disclaimer: After many years in the brokerage industry I started my own business in 2021. I published the book "Paleo Trading: How to trade like a Hunter-Gatherer” and launched Paleo Capital that manages a hedge fund according to the principles described in the book. I emphasize that nothing written on this blog is to be regarded as personal advice or a concrete call to take positions. Everyone must be responsible for their own decisions and familiarize themselves with the products they use.
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