Chipping away at the semiconductor market

Provided by Magellan

It’s a fascinating time in the semiconductor chip market. Thanks to the proliferation of devices, and even cars, that are heavily dependent on chip availability, and geopolitical trends that may impact supply, chips are under a global spotlight.

In a recent podcast episode of Magellan — In the Know, Head of Global Equities and Portfolio Manager Arvid Streimann discusses the semiconductor chip ecosystem with Investment Analysts Adrian Lu and Dom Facchin.

Listen to the full podcast here:

Exploring the critical role chips play as the building blocks of innovation, driving structural growth in areas like artificial intelligence, electrification, and cloud computing, they discuss the implications of chip manufacturing, and the strategic considerations guiding investment decisions. The global chip shortage has spurred a movement among governments worldwide to enhance their chip manufacturing capabilities, driven by concerns over economic security and technological sovereignty. With the majority of chips currently manufactured in Asia, particularly in Taiwan, South Korea, and Japan, governments are keen to reduce dependence on a single region for such critical components.

On the demand side of chip production, they question the utilisation of increased supply amidst historical fluctuations in semiconductor cycles. Structural growth drivers such as AI and cloud computing underscore the increasing utilisation of chips. Firstly, the proliferation of technology has led to the adoption of new devices like smartwatches and AirPods, alongside the expanded use of computing resources. Secondly, existing technologies are being enhanced to offer more capabilities, illustrated by advancements in vehicles and smartphones.

Investment Analyst, Dom Facchin talks through the strategic decisions companies like Apple face regarding chip procurement, either through in-house development or purchasing from external suppliers. Apple transitioned from using off-the-shelf Intel chips to designing its own M1 chips for Mac laptops. This was motivated by challenges of overheating and performance issues with Intel’s chips, leading Apple to prioritise control over chip design and to optimise user experience. By controlling the innovation cycle and customising chips for each product, Apple aims to enhance performance, efficiency, and battery life, therefore attracting customers willing to pay a premium for superior products. The example of Apple shows the significance of chip design in shaping consumer experiences and market competitiveness.

Data centres have emerged as significant consumers of chips, surpassing smartphones to become the largest component of Taiwan Semiconductor’s business. Investment Analyst, Adrian Lu, provides insight into the increasing demand for computing power, driven by applications like artificial intelligence (AI), that has led to the development of more powerful servers and specialised accelerator chips. This trend towards high-performance computing has also necessitated additional components like memory, networking infrastructure, and cooling systems within data centres. The shift towards cloud computing, of which AI is just one aspect, is expected to continue driving demand for chips in data centres.

In the automotive industry, the increase of semiconductor content has been notable, particularly in electric vehicles (EVs). While traditional internal combustion engine (ICE) vehicles contain around $750 worth of semiconductor content, EVs currently incorporate approximately twice that amount. This increase is attributed to the integration of semiconductor components into various vehicle systems, including the powertrain and onboard charging systems. As the automotive industry moves towards greater vehicle functionality such as autonomous driving, the demand for chips is expected to further escalate, with requirements for additional sensors, connectivity, and high-end processing capabilities.

Head of Global Equities and Portfolio Manager Arvid Streimann delved into how we approach the semiconductor investment opportunity as investors. Outlining the three-stage investment process that Magellan uses when assessing companies. Magellan’s investment process involves assessing quality, valuing companies based on risk-adjusted returns, and managing diversification and risk.

Arvid shares his optimism about the industry’s growth, driven not only by chip makers but also by companies like Alphabet, Microsoft, and Amazon, which fuel demand through cloud services. For example, ASML, a key player in chip fabrication machines, stands out due to its market dominance and robust growth potential. Similarly, Amazon’s AWS business and tech giants like Alphabet and Microsoft are positioned to benefit from industry growth and AI development. However, noting to be mindful of risks, such as geopolitical tensions like the Taiwan-China relationship and economic cycles. Making sure to navigate these challenges by closely monitoring supply-demand dynamics and maintaining a balanced portfolio.

View the full transcript of the podcast here: Transcript

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