The global industry today is tied to the production of semiconductor components. Most importantly, this dependence will only grow. This applies to both complex solutions (computing systems, artificial intelligence) and more understandable ones. In the automotive industry, for example, this is the replacement of internal combustion engines with electric motors. In this article, we will consider the expediency of investing in semiconductor stocks.

Sector outlook

Let's start with the fact that the semiconductor sector really has a huge potential for growth in the next tens or even hundreds of years. What is it connected with? The semiconductor market is in a stage of active development and growth right now. The volume of the market today is more than $50 billion and its growth potential to several trillion in the next 10-20 years.

The fact is that for smartphones, computers, data centers, home appliances, and cars, the number of which is increasing, semiconductors are required. But it's not enough just to produce semiconductors to make a phone or car control unit smarter, faster, and more efficient. For this purpose, there is a need for faster processors, RAM, graphics adapters, and other semiconductor products.

Accordingly, semiconductors are goods of regular demand, which require constant updating and the demand will only grow. This industry can be compared with oil production 50-70 years ago, when there were fewer cars, planes, and steamships and the world needed the growth of the oil industry.

With semiconductors, in the same way, the world lacks the manufacturing capacity to meet all the demand in the market.

About the sector

The semiconductor market can be divided into several main segments by demand:

Mobile devices

The largest segment of the semiconductor market. Its growth is spurred on by the war on the world stage, between Apple and its competitors for the most popular and productive smartphone.

Computers

This segment is in second place and there is also an active war for technology on the market.

Home appliances

Anything can be attributed to them. TVs, washing machines, microwave ovens, etc. The intensity of passions is simpler here, but manufacturers are also fighting for the first place.

Cars

The car has a lot of auxiliary control systems and driver assistants, from multimedia to autopilot. In fact, any electronic unit of a car requires a processor or memory. Cars are on the rise, technology is on the rise, and they are also fueling strong demand for semiconductors. In 2020 and 2021, due to the shortage of semiconductors, Tesla, GM, and VW experienced huge difficulties in the production of cars precisely because of the shortage of semiconductors.

You have probably heard about companies such as Nvidia, TSMC, Qualcomm, and AMD, which are considered semiconductor manufacturers, but this is a huge misconception. Not all companies actually have their own production facilities.

In this regard, the semiconductor market can be divided into 3 categories:

Category 1. Real semiconductor manufacturers (companies have their own production facilities and produce semiconductors for themselves or contract manufacturing for customers).

Category 2. Brand holders. These companies have a big name, brand, marketing, their own market, and even architecture. But the semiconductors for them are produced by the companies from the first category.

Category 3. Suppliers of components. This is the backstage of the industry. Companies in this category do not produce semiconductors and do not have their own brands. But they supply manufacturers with production equipment and various testing services. A distinctive feature of this category is independence. That is, they do not care who will be the leader in this industry, TSMC, Intel, or Samsung, they only care that the market is growing, and they are growing with it.

The biggest companies to invest

It's time to look at the biggest players in each category we have just considered.

Manufacturers:

1. Taiwan Semiconductor (TSM);

2. Intel (INTC);

3. Samsung (SMS);

4. NXP Semiconductor (NXPI);

5. ON Semiconductor (ON);

6. Texas Instruments (TXN);

7. Analog Devices  (ADI);

8. Micron Technology  (MU);

9. Microchip (MCHP);

10. Tower Semiconductor (TSEM).

In fact, there are a few more manufacturers, but some of them are inaccessible to ordinary private investors, and the other part is not so attractive in terms of investment.

Brand holders:

1. Nvidia (NVDA);

2. AMD (AMD);

3. Broadcom  (AVGO);

4. Qualcomm (QCOM).

These companies launch high-demand end products such as video cards, processors, network adapters, processors for smartphones, RAM, and flash memory under their own brand and with their own architecture. But they are produced on the basis of TSMC, Samsung, Intel, and other companies from the 1st category.

Component suppliers:

1. Applied Materials (AMAT);

2. ASML Holdings  (ASML);

3. Entegris (ENTG);

4. IPG Fotonics Corporation (IPGP);

5. KLIA Corporation  (KLAC);

6. Lam Research (LRCX);

7. Universal Display (OLED);

8. Teradyne (TER);

9. Cadence Design Systems (CDNS).

This category of companies does not produce semiconductors at all and is not a brand holder. They are equipment suppliers and provide test services, circuit designs, and software. The main plus is that there is less competition between them, and in fact, it doesn't matter who will be the market leader of manufacturers, TSMC or Intel. For this category, it is important that the semiconductor market develops, and all manufacturers will still come to Lam Research or Teradyne for equipment or testing.

How to choose the company to invest in?

It all depends on the risks you are willing to take. The market for manufacturers and brand holders is more competitive and they depend on the mood of the crowd, any negative news can collapse the value of shares. Semiconductor suppliers are more relaxed, but also show growth in the hundreds and thousands of percent. It is recommended to have stocks of all 3 categories in the portfolio.

The risks in semiconductor stocks

Experts expect that in the next few years the semiconductor industry will grow year by year by 15-20%. The industry leaders will be manufacturers of memory chips (for example, Samsung). Companies that make semiconductors for cars or embedded microprocessors will be somewhat behind.

The introduction of 5G and the development of cloud technologies are important growth drivers. Semiconductor manufacturers and their stocks are the beneficiaries of any innovation. No innovation today can be imagined without microcircuits and chips.

The main risks associated with investing in this industry are:

1. Revaluation of individual issuers by the market.

2. The likelihood of new manufacturers coming to the fore. For example, within the framework of the development program for the production of semiconductor components in the EU. It assumes that by 2030 these countries should account for 20% of sales. By the beginning of 2021, this figure was only 10%.

3. The recession period that occurs in any cyclical production. For example, in the semiconductor industry, there was a moment when it turned out to be unprofitable to mine bitcoin (2019). As a result, a large supply of used video cards has formed on the market. The fall in demand for these products and for the chips used to manufacture them has affected the entire industry. It is beyond the power of a private investor to predict at what point the recession will occur.

Final thoughts

The semiconductor industry and the stocks of the companies producing them are promising investments. It is hardly worth expecting that this area will become less relevant in the foreseeable future. If you are interested in investing in semiconductor stocks and looking for a good platform to manage your financial goals, pay attention to Gainy.

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