One thematic with three tailwinds

For every successful tech stock, there are dozens of others in its supply chain, including at least one semiconductor company. And just like the old strategy of ‘selling picks and shovels to miners’, there is a strong and enduring case for investing in the semiconductors that form the nerve centre of the vast and growing tech sector.

Three tailwinds behind the industry – the rise of 5G, machine learning, and the intense US-China rivalry - are now converging into a storm, propelling the long-term growth in semiconductors into an exponential trend. 

Nick Griffin from Munro Partners calls this ‘The coming sandstorm’ and talks through the opportunity here along with ways investors can harness this storm in their sails.

Transcript

"We think semiconductors have always been in a structural growth trend, but it's about to inflect in a more serious way.

What we're talking about here is, semiconductor demand has been growing in a fairly linear fashion for a long period of time. But you've got a couple of things coming together now all at the same time, which suggests that it could start to grow exponentially.

And the first is 5G technology. So 5G technology will ultimately mean everything in the world will get connected. And so you'll connect your traffic lights, you'll connect your car park, you'll connect your fridge, you'll connect your front door. And all of this is going to create a whole bunch of data, and that's extra data. So you're going to get exponentially more amounts of data created in the world because of 5G technology.

That data will then go up to the cloud where it will be processed through artificial intelligence, which is the second big trend that's coming to the market. And artificial intelligence will be able to process that in the cloud. So you're going to need a lot of compute power for that also.

And the last big trend is, we have the two major superpowers in the world, effectively going to war over technology, being China and the US, and most of the biggest companies in the world going to war over AI.

And so, the solution to this is just to throw lots of Silicon at it. Lots of semiconductors. We call this the coming sandstorm. And it's coming. And so from our point of view, semiconductor companies are effectively the weapons manufacturers in this war.

And what's interesting about the semiconductor companies is, this is happening at a time where there's fewer and fewer of them. So, the commodity nature of the business has sort of gone away, and there's now just a couple of players that dominate each vertical.

Yeah, so we ultimately think when we look at these semiconductor companies and the weapons manufacturers in the war, if you look at some of these verticals, and I'll give you an example around lithography.

So lithography is like the stencil that you would put on a road. If you are putting a crossing or like a stencil, you might've done an arts class. Lithography is your ability to draw the chip design onto the chip.

And as the chips get smaller and smaller and as they get more and more transistors on them, it gets harder and harder to do. And if we look at ASML in Holland, we like to call it the most important company in the world that no one's ever heard of. It's basically now a monopoly in high-end lithography, there's no other company in the world that can compete with them to enable the shrink to continue in semiconductors or allow Moore's law to continue.

And so, they have a technology called EUV technology. Most people haven't heard about it, but it's a machine that allows Moore's law to extend and they sell one of these machines literally for 130 million euros. That's more than two Boeing 737 planes. And so ASML is now a monopoly selling equipment, at very high gross margins. And it will sell them for a very long period of time because of its ability to extend Moore's law. So, that's one example.

The second example would actually be in Foundry. So most semiconductors are actually made by third party suppliers. The biggest one in the world is TSMC. They now have nearly a 50% market share in high-end lithography. The very small, very advanced chips. And so ultimately if you're AMD or if you're in video and you want to get a chip made, you have to go to TSMC. So they're now also a virtual monopoly.

And the last one we'd talk about is memory. Memory is the biggest commodity in semiconductors in the world. And it basically goes into your phones and all your computers.

We're literally down to three companies in the world that can actually produce memory being Micron, Hynix and Samsung. So, that's effectively an oligopoly. So at the same time that all this demand is appearing, you also have this situation where the competitive environment is weakening. Which is going to create a really good opportunity for these companies in the years ahead. 

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Munro focuses on identifying and investing in companies that have the potential to grow at a faster rate and on a more sustainable basis than the peer group. To find out more, hit contact below. 

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