Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
How should you invest in semiconductors? 7investing's advisors Simon Erickson and Krzysztof Piekarski and external guests Jose Najarro and Nick Rossolillo share several stock ideas in the chip industry.
February 7, 2023– By Simon Erickson
There are few industries more important to the world than semiconductors.
$600 billion worth of chips are sold across the globe each year. And they go into everything — from permanent-pressing washing machines and spreadsheet-loading laptops to application-crunching datacenters and self-aware automobiles. The world’s thirst for computing is continually increasing and the chip industry is shifting into a higher gear to keep up.
Yet it’s not just market demand that heavy influences this industry’s key players. Significant geopolitical implications are present as well, with developed economies needed cutting-edge chips as a crucial part of their national security. The international incident between Russia and Ukraine and the rising tensions between China and Taiwan are reminders that geopolitical factors are as high now as they’ve ever been. Many countries are scrambling to find ways to guarantee domestic chip supply, to avoid a potentially debilitating supply disruption.
What does all of this mean for investors? Are there companies who have efficiently leveraged their fixed costs to achieve massive economies of scale? Are there newcomers or less-well-known companies who are necessary to the process and are opportunities to investors? And is the gravitational pull of national interests serving as an advantage to certain companies and as a huge headwind to others?
To answer those questions, 7investing hosted a special “Semiconductor Roundtable” this month. 7investing lead advisors Simon Erickson and Krzysztof Piekarski were joined by external guests Jose Najarro and Nick Rossolillo. Jose and Nick are good friends, who together host the “Semiconductor and Moore” podcast. You can follow along with their show by subscribing to it on YouTube.
In the roundtable discussion, each panelist presented a key part or factor of the semiconductor industry. They also introduced a few of the important companies within it.
First, Jose discussed the chip designers. He described how consumer-facing applications like self-driving automobiles or OpenAI’s ChatGPT chatbot are powered by cloud datacenters, which use super-efficient chips designed by companies like NVIDIA (Nasdaq: NVDA) and AMD (Nasdaq: AMD). The computing horsepower necessary to run artificial intelligence algorithms is increasing quickly, meaning there’s a skyrocketing demand for the world’s most advanced chip designers.
Nick then discussed the importance of validation software in the design process, to ensure new chips will pass specification and tests to perform as expected. One leader in providing electronic design automation software is Synopsys (Nasdaq: SNPS), whose subscription licensing business model has created a high-margin recurring revenue stream for investors.
During a short break, 7investing reminded listeners that Zack’s Investment Research was the sponsor of today’s podcast. Zack’s special report entitled “5 Stocks Set to Double” is available to download for free at www.zacks.com/7investingpodcast.
Krzysztof discussed the semiconductor manufacturing segment, citing Chris Miller’s Chip War book as a key influence to his thinking. He described the importance of cutting-edge chips to national security interests and how two companies — ASML (Nasdaq: ASML) and Taiwan Semiconductor (NYSE: TSM) — are necessary for the developed world to continue to function. Fabrication facilities cost tens of billions of dollars to build, giving the companies in this capital-intensive segment high barriers-to-entry against potential competitors.
Finally, Simon used geopolitical tensions as a frame for the investing thesis in Intel (Nasdaq: INTC). Intel has been one of the most important semiconductors of the past half-century, whose co-founder Gordon Moore pioneered the concept of “Moore’s Law” that led to an exponential rise in the world’s computing power. Intel has a boatload of problems, yet faces a unique opportunity of providing America with domestic chip supply. Selling cheaply at just 9x earnings, Intel could be an intriguing opportunity.
At the conclusion of the conversation, each of the panelists voted on which of the six stocks mentioned they believed was the best opportunity for investors today:
We hope you enjoyed our 7investing Semiconductor Roundtable! Please click on the link below if you would like to see our official stock market recommendations every month — which includes Krzysztof’s under-the-radar equipment provider in one of the industry’s most important new areas.
Publicly-traded companies mentioned in this interview include AMD, Apple, ASML, Cadence Design Systems, Intel, Microsoft, NVIDIA, Qualcomm, Synopsys, Taiwan Semiconductor, and Tesla. 7investing’s advisors or its guests may have positions in the companies mentioned.
03:20 – Chip Designers: NVIDIA and AMD
14:20 – Validation and Electronic Design Automation: Synopsys
24:36 – Semiconductor equipment and manufacturing: ASML and TSMC
37:00 – Geopolitical risks: Intel
47:44 – The vote! All panelists vote for their favorite investment opportunity
Simon Erickson, Krzysztof Piekarski, Nick Rossolillo, Jose Najarro
Simon Erickson 00:05
Hello everyone and welcome to today’s episode of our 7investing podcast where we’re here to empower you to invest in your future. You can learn more about our 7investing membership where we recommend our seven favorite stock market opportunities each and every month at 7investing.com/subscribe, where you can get started for just one single dollar.
Simon Erickson 00:26
I am 7investing founder and CEO Simon Erickson. I’m very excited about today’s program, we brought in some of the smartest minds around the world to talk about semiconductors. This is a huge industry. This is approaching a trillion dollar industry globally. And so we’ve got to look at some different perspectives on it. So not only by myself, I wanted to bring in some some internal and external analysts for this one as well. I’m joined on the show today by 7investing fellow lead advisor Krzysztof Piekarski. We’re also joined by Jose Najarro, who is the host of Jose Najarro stocks, and also by Nick Rossolillo, who is the host of chip stock investor and both of them together are also working on a project called “semiconductor investing and moore”. Gentlemen, it’s nice to see you all here today. Krzysztof are you doing okay up in Austin?
Krzysztof Piekarski 01:15
Oh, never better Simon although is that chilly bike ride to campus this morning. 32 degrees, but sunny and ended the week of classes. Things are great.
Simon Erickson 01:26
Fantastic. And Jose, how are things going? I think you’re up in the Northeast right now the East Coast. Is that right?
Jose Najarro 01:31
Yeah, Krzysztof just made me roll my eyes a little bit when he was complaining about the 32 degree weather here in Jersey, we’re definitely getting a nice cold front right now.
Simon Erickson 01:40
That’s fantastic. And Nick, I believe you’re somewhere in the world. I never know where anymore. I forget.
Nick Rossolillo 01:47
I forget at the moment as well, but it’s cold. It’s cold. It’s real cold right at the moment. Fantastic.
Simon Erickson 01:55
Looking forward to all of these perspectives. You know, we kind of for the roundtable today, we’ve decided to break this up into topics and introduce a few companies for each topic for investors to dig deeper into. These are not necessarily buy recommendations. They’re also not necessarily companies we are personally bullish upon. But they are kind of representative of the topic that we’ll be discussing about. And just to add some extra flavor to this presentation today, at the very end, we’re all each going to vote on which of the companies mentioned, do we believe is the best opportunity for investors today.
Simon Erickson 02:31
And so we broken this up into two sorry, into four different segments. And the first Jose is going to be introducing chip designers, the companies that are actually designing chips out there, and introducing a few publicly traded companies to choose from in this segment. After that Nick is going to be talking about verification and validation companies so that the chips are designed and making sure that you’re getting all the bugs out of them. So they’re working the way that they should. Krzysztof is going to be chatting a little bit about the equipment manufacturers and the manufacturers of those chips after they’re divine, designed and tested. And then just to add some extra controversy at the end, I’m going to talk about the geopolitical tensions around the world and how that’s impacting the semiconductor industry. Okay, on that I think I’m going to put myself back on mute for a little while. Jose, why don’t I give the floor to you to talk about chip design?
Krzysztof Piekarski 03:20
Thank you for that Simon. And I think all these four topics are super important within the semiconductor market. I obviously might be a little bit biased and say, chip design is probably one of the most important as this kind of evolving the overall world that we have today. And the technology that it’s kind of innovating at the moment. For example, these chip design, there are companies that I’m going to mention are companies that deal with technology that goes are in products like autonomous vehicles, or AI, machine learning data centers to kind of help with all these kinds of computational needs that are happening around the world. So normally, here, the chips designed we do have kind of companies that design mature chips, which are older style products, but then the most advanced place as well.
Krzysztof Piekarski 04:06
And the two companies that I wanted to bring in, in discussion today are AMD and Nvidia. These two are very popular companies around here in the semiconductor market. I believe these are probably one of the main known. And the reason being is both these companies originally started mainly in the consumer market. I’m pretty sure if you are a gamer if you’ve kind of created your own computer if you’ve been have a laptop or desktop, you know these two players because either their graphics cards for AMD or Nvidia or maybe AMD’s kind of processors are what’s powering your computers at the moment and has kind of even the kind of computational power we need on our everyday laptops continue to increase these compute companies continue to design even better processors every year we get either a new generation of processors either from the CPU front or the GPU. You front. But now these companies, Simon and the rest of the team, they’re right, they’re no longer becoming consumer dependent. They’re kind of entering those other spaces like, for, I want to say for semiconductor investors.
Krzysztof Piekarski 05:12
Now one of the big bookcases is data centers in artificial intelligence. And this alone the it’s such a, I wouldn’t say such a broad market that data centers in general can be used for, for numerous things, artificial intelligence, these data sensors can be powered the AI for, let’s say, some of these advertisement platforms to help find the best way to kind of hit you with an ad and make sure that you become a great consumer. For all these video streaming services, it helps you kind of find the perfect show for you to watch and recommend and keep that kind of user retention on their platform for autonomous driving, it’s helping kind of understand the sensors and how a vehicle should react on real time. So AMD most recently on on, just a quick look on on some of their data center solutions, at the end of December released their fourth generation of EPYC processor Genoa, which is seems to be which seems to be doing great and forms of adoption. Right now. It’s the fourth generation, every generation, the adoption has become stronger. And this is one of the big bullish cases for this company at the moment as they continue to grab market share from some of the giants out there. And NVIDIA on the other hand is also focusing they just released their A100 system, which is a GPU for data centers, and the data as well continues to grow. There have been a few reports out there where the hopper and NVIDIA continue to dwell with the AI products that we’re seeing already in the market chat GPT that online, online chat engine, a lot of people are kind of forecasting how products like that can just come out of nowhere, and can kind of already create a massive, massive amount of demand for some of these computational powers. I can go on a little bit more, but before I just want to hear some of your thoughts in from some of you guys hear about this market in general?
Nick Rossolillo 07:08
Jose. I just read I was doing a little research. After we talked on our last episode of the summer investing in more podcasts. And I was doing some digging because I was curious about this. I remembered Nvidia CEO Jensen Huang saying this at some point a couple of years ago, during an earnings call about how at that particular time he was talking about most of the AR AI market was training AI models. And now it’s moving to inference. So a lot of AI models have now been trained like your chat GPT inferences. Now, when you type in the prompt to chat GPT and you say chat GPT helped me cheat on my college exam. Chat GPT helped me write a title for this podcast. And the inference is like, Okay, here’s the answer. And like two thirds of the AI market are going to actually be driven by inference, the training was only 1/3. So I was looking for a rough number on that. Because the immediate thought is, like, we’ve already seen so much massive growth for companies like Nvidia and AMD from data centers because of AI, how much could there possibly be left in the tank? And it seems it seems to be maybe quite a bit more now that these things like chat GPT are just now starting to become commercialized. That kind of gets me excited about all those things that you were talking about Jose, with this, this AI market. That’s just kind of the tip of the iceberg at this point.
Krzysztof Piekarski 08:49
Definitely Nick, and I want to say you just got me excited too, because I mean, just think about it in the autonomous marker in the automotive market where a lot of these semiconductor companies are focused on, if we ever want to get into self driving cars, all those cars are going to need those sensors, and kind of be sending that information back to all these data centers. At the moment. We don’t have any cars or very little, just the ones that are training in random cities. But imagine a four United States of just cars, sending that information, the amount of computational power that it’s going to be needed, when or if we get to that in the next decade.
Simon Erickson 09:23
I wanted to comment to you about GPT because I feel like those are the three letters that are going around the internet right now. You can’t have a conversation without talking about open AI GPT right now. I mean it kind of behind the scenes of what’s going on in that is this the conversational Chatbot. Now, right, like Nick said, you can ask it to cheat the MBA exam, which you just saw for Wharton, you know, and other things that you can get a a AI response that’s powered by these chips behind the scenes. You know, there are neural networks behind the scenes working these data centers, like Jose pointed out that are so important. A fun trivia fact: for each 100 word response that GPT gives you, it costs about three cents in computing processing to respond each time. And that sounds like it’s so cheap, right. But when you think about all of the queries, and all the things being asked to this GPT is actually costing about $100,000 per month, just for the computing that Microsoft’s using an Azure, that it’s charging for that computational horsepower. And then of course, Microsoft is giving a lot of that money to Nvidia for the 100 GPUs and also to AMD and to other providers, as chips that are designed by these companies that are cutting edge out there really cool, really cool application to GPT.
Krzysztof Piekarski 10:36
Jose, I have to ask because I have a few of my buddies are self-styled nerds, if you will, who are working on some quantum computing stuff, and they’re they’re very much in the first line of fire using the most advanced computing in from them, I hear something that’s a rough equivalent of Nvidia is the obvious leader in terms of I mean, I guess everything, Power Strength and like that, there is no question. And so um, and so, when I also think about the old poker adage that says, the single worst hand in poker is the one that second best. And I combine Nvidia and AMD as two of the maybe most tempting options to invest in terms of chip design. Why can you make a case for AMD that’s made that I’m not taking into consideration?
Krzysztof Piekarski 11:47
That definitely want to say, this is something that I’ve always questioned myself, I personally am a shareholder of both these companies. And it’s like, how can I be rooting for one and also be rooting for the other one, if they’re kind of hitting similar markets? I want to say one thing that is important is all these data sensors and computational powers, they all focus in different workloads, right, the workloads may be needed for for weather, for weather forecasts might be a completely different workload needed for autonomous driving. And I want to say each of these are kind of getting in different segments. And there might be also a power performance, one of them might be better in raw performance, while another one might be better in power efficiency. The other thing is AMD and Nvidia at the moment. AMD is seems to be a true leader in the CPU processor. While Nvidia seems to be a leader in the GPU processors, again, they all have kind of their individual workloads. In the future, we are seeing that they their competition is going to start to mix a lot closer. But I do believe what’s going to be the difference is all how it’s the consumer itself or these data centers, and how they’re going to want to structure their data centers, they’re going to have the they’re going to want to have I want to say choices, like I mentioned within those different workloads, as well. And then the other side is outside of chip design. These companies are also kind of while they do have similar markets, they’re also hitting different markets. And NVIDIA, for example, is focusing a little bit more in the software side. And you mentioned a little bit about quantum computing there. And forms of hardware, it seems like we’re not really there too much, except these researchers that most of your colleagues are probably are doing that but in forms of, of, of us getting there, it seems like it’s gonna take some time, but Nvidia on the software side has created some form of simulation to simulate how quantum computing can be in the future. AMD doesn’t have software solutions like that, where AMD is more focusing on kind of maybe entering the embedded market with their kind of acquisition of Sitelinks. So while they do have similar market competition, it does seem like outside of that they’re also focusing in other markets where they can kind of mix well with each other.
Simon Erickson 14:05
Let’s use that application analogy as a great segue into the next section of our podcast here today. We’ve got all these cool chips that have been designed to do all sorts of neat applications out there. But Nick, I think it’s probably pretty important to make sure they’re working as designed, right?
Nick Rossolillo 14:20
Making sure they’re working as designed. And also maybe just getting them designed in the first place. So this company Synopsys that you you mentioned at the outset, Simon has its hands. I shouldn’t say its fingerprints maybe all over the chip industry very quietly. Very few investors I think I’ve ever heard of Synopsys so I was aware of this company, but I really kind of started doing some digging, I think it was last spring or summer when I was presented with this company Cadence Design, which plays in the same space. It’s called the electronic design automation software, space EDA software, which you can think of is like Autodesk AutoCAD. But for chips, it’s dominated by Synopsys, Cadence and a company called Mentor, which is now owned by Siemens, the German industrialist. But I thought, okay Cadence, I know who that is. But I think Synopsys is bigger, why not Synopsys so I started doing some digging, and sure enough Synopsys far and away the leader in this space. It’s a software design company. They’re also a little bit like ARM computing. So that’s the company and NVIDIA tried to acquire a couple years back, so they actually have like some ready to go out of the box chips that a company could patent or could license the patent on and then adjust to their needs. And then as you said, Simon, I think this is a really critical component. So software, design checks, to make sure it’s going to pass cybersecurity tests to make sure that the software licensing is all good and valid. A lot of a lot of things kind of embedded in there to make sure that the software is well integrated with the chip itself. So that there’s this nice seamless design process from end to end from the hardware all the way to the end software product that we use. And I didn’t ask this Simon before, are we sharing screen? Can I share screen here?
Simon Erickson 16:31
Go ahead, Nick. Absolutely.
Nick Rossolillo 16:33
Okay, I’m gonna throw this up and just maybe kick it your guys direction.
Simon Erickson 16:38
And talk it out, too though, Nick, if you can. For anyone who’s listening to audio only describe what you’re looking at on the screen.
Nick Rossolillo 16:43
Okay, got it. So we created two revenue breakdowns here for And see talk it, the first time based products, it’s basically software as a service that is close to 60% of the company’s revenue, $2.99 billion upfront products, those are things like the patent licenses on ready to go out of the box chip designs 1.2 billion in the last year. maintenance and service, kind of like it sounds, maintenance and service. I’ve got a second breakdown here, though. So 91% of the company’s revenue in the last year was semiconductor and system design. Again, this is just another way to look at the revenue. So over 90%, actual semiconductor and computing system design, and then 9%, and that application security testing. So that segment in particular is small. But as we all know, like cybersecurity, an incredibly massive and growing need right now and Synopsys kind of in this position to tackle it. Like right from the get go right? When a company starts designing a chip, that’s purpose built for maybe a specific application, right from the start, let’s make sure the hardware is going to be good for cybersecurity, the software is not going to have any holes in it, no leaks. So this one’s; this one’s intriguing. To me, not the fastest growing software business, you’ll find. But I find it to be kind of a unique play on the chip industry because a big investor complaint. chip stocks are cyclical software kind of more steady, slow and steady, high profit margins along the way. So we didn’t discuss questions beforehand, but maybe, you know, hit me with questions here, as well. But what do you guys think of a company like this? What would you be looking for? To invest in a company? Like Synopsys that’s a software based play on chips?
Simon Erickson 18:54
It’s fantastic. They build a great model. I’ll take the first stab at this and because we open it up, but you know it they built out such a nice backlog of you know, this subscription license business that you said it’s very responsive to the ship makers, right? They don’t need to go out and they build, you know, these giant fabs, they’re there with the software to verify what’s working in the design part, you know, the IP part of it, I think of these as the building blocks of chips, right? It’s kind of like Lincoln logs or Legos or Minecraft, depending on what generation you’re from. But you need to have these building blocks that are in place already for designing chips. You don’t need to build them from scratch all the time.
Simon Erickson 19:29
The only the only thing I wanted to add maybe from my perspective to is that Synopsys has basically committed I believe it’s 80% of their free cash flow to buying back shares. They are a shareholder friendly company that as they have this nice business that just throws off a lot of cash are using it in a way that’s rewarding to us as shareholders to
Krzysztof Piekarski 19:52
I was just going to make a quick point where it right now. The semiconductor design is no longer just these companies like AMD and Nvidia era, some of our popular companies like Apple right to sign their own chips, Amazon creates their chips for their data center. So Tesla designs their own chips for for their autonomous driving. So sometimes when we think about semiconductor companies or something like this, that in the chip design, we also got to remember that the big players are also in this space as well, that can definitely be a nice amount of customers for the software place.
Krzysztof Piekarski 20:26
Nick, I want to ask you about commodification, because I guess that’s something that all investors have to be wary about. And the flip side of that, of course, is the moat, you know, what protects an investment from being commoditized? And often, you know, with with things that are manufactured, there’s a race to the bottom, and then the companies might make great products, but investors suffer. What is the moat that you see? With Synopsys? Why can’t another company say Yeah, us too.
Nick Rossolillo 21:09
That is a fantastic question. Krzysztof, and, frankly, it’s a beef that I have with most software companies, one that I’ve come to have with most software companies in recent years. I think we give them more credit than they are due for what kind of competitive moat they have. Because the software business is so asset light, it, it kind of in itself creates a pretty shallow moat type of business by design, just because it’s so easy, versus like a fab company, like you’re going to talk about here in a moment where you have a hard asset, it has manufacturing, and it gets commoditized over time, but it’s expensive. That’s a that’s a barrier to entry when you’re dealing with, you know, pieces of equipment that might cost 10s of millions, or in some cases, hundreds of millions of dollars, just the piece of equipment itself. So that is a problem for Synopsys and Cadence and all software companies. And I think in addition to you know, the company spinning off that free cash flow, like Simon mentioned, to shareholders via share buybacks and dividends, they have been quite acquisitive over the years, buying up smaller appears and kind of bolting them on to their existing their existing operation, both to strengthen what they already have, but also, you know, to eliminate a potential future rival so I think that is absolutely a risk a big risk that I won’t try to explain away for Synopsys because I think it’s it’s absolutely a real thing.
Simon Erickson 22:45
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Simon Erickson 22:56
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Simon Erickson 24:22
Let’s bring it back to the program. Gentlemen, we’ve talked about chip design. We’ve talked about EDA now let’s talk about these expensive capital investments that are required to manufacture the chips. Krzysztof, I’ll hand it over to you for this one.
Krzysztof Piekarski 24:36
Simon, forgive me but I can’t help proselytizing about this book that you’ve heard me proselytize about so often, but it really helped me understand why how we got to where we are and the book I’m referring to is Chip War by Chris Miller. What you learn in fall in the history of the semiconductor industry is that because of the extraordinarily high capital, intense, intense business, that is the making of chips and out of complexity and you end up the history ends up consolidating into a few main players, let’s say that anybody in this business, basically, at some point, got to the came to the conclusion that we had best outsource this to the professionals. And let’s worry about the specific thing that we’re working on, right. And so out of that pattern, there arose with, I think, two companies, at this moment in time, that if these two companies were to go away, I don’t think I’m exaggerating if I said the world would kind of stop. And it sounds like hyperbole, but I really don’t think it is, in other words, almost everything that we now take for granted, at least in I would say, developed countries, runs on on semiconductors, one way or another. phones, computers, refrigerators, cars, watches, you name it, you can’t do without these things. Or it’s I mean, we would go back to maybe what we could perceive as caveman days. Right. And so what I think is fascinating, is that given that everything revolves around semiconductors, how is it the case that two companies, in this case.
Krzysztof Piekarski 26:48
I’m referring to ASML, and TSMC, kind of, are responsible for, for the entire worlds, you know, continuing to function. I think I’m trying to describe that I think of it is a bottleneck of proportions that I don’t know if you guys would agree with this, but I’m not sure if there ever was a time where so much so much depended, was concentrated in the hands of say, just one player. So let me make this concrete. ASML makes the most complicated and expensive machinery on the planet. And I forget the details, but it’s like the number of parts required to make this machine is in the magnitude of hundreds of 1000s. And I think, Nick, I think it’s like hundreds of millions to, to make some of these. And what what one of these machines does, what it’s trying to do is basically reduce the wavelength of light used to make the most complex chips. So as the chips increase in complexity, you need smaller and smaller extreme wavelengths of light, right? abbreviated to EU vs. But to make one of these is basically you can’t No company no, nobody can do this, except for the one company ASML. So from an investor standpoint, you kind of have to, you know, step back and think like, how is it possible to weather the consequences of there being such a bottleneck? Lithography, what prohibits this from being an extraordinary investment when there is nobody else? Literally, that could do this? So what prevents a company like this that has such a is a position of power from say raising prices? Or you know, all the other things that come from a an an uninhibited monopoly? I guess I don’t know how else to say that.
Krzysztof Piekarski 29:17
To paint a secondary picture. And Simon, no doubt you’ll you’ll continue in this narrative. TSMC is a fab that doesn’t have this one and all monopoly but it is such a significant player. That should TSMC basically say we’re, we’re no longer in business companies like Apple would be in very, very bad shape. The issue there is that, unlike ASML, which is security located in Western Europe, TSMC is in the crosshairs of from the west Western standpoint could be labeled as an aggressive authoritarian regime. Who, which is not shy about sending in warships in the, in the, into the canal between China and Taiwan saying, Yeah, we know the world runs on this factory on this island and by the way we believe the island belongs to us. So the investment case for something like TSMC is to me much more complex than it is for something like ASML. Because should China wish to interfere politically. I’m not sure how the stock would react. I don’t want to ruin the story here. But there is a sort of, there is a lot of game theory obviously, going on with this stuff, where you could say, in a similar light with like nuclear weapons, you could say, we know you’re not going to use it, because if you use it that’s guaranteeing your own destruction. And so China two runs on everything that TSMC produces. So were they to compromise the integrity of that fab. it’s lights out for them as well. So it gets real complex real fast. But all of which is to say, anyone investing in the semiconductor industry, I think needs to first begin to admit how precarious all of this is. Anytime you have basically, you know, one or two pieces on the chessboard, like a king and queen that simply cannot be compromised. Then the repercussions of that kind of concentration of power are severe in all kinds of ways. For the better and for the worse. So I think I’ll I think I’ll leave it there for now and see what you guys have to say about about that high level view.
Simon Erickson 32:23
Would anyone like to comment about the better or the worse? You know, the comedy or the tragedy of the story? And some great points that Krzysztof brings up.
Nick Rossolillo 32:30
It was drop, was what that was. It is a very weird situation. Krzysztof, especially the the TSM. situation. Yeah, I don’t think it is hyperbole, it would if for some reason that disappeared, TSMs chipmaking capabilities disappeared or taken out. Yeah, it would reset. society as we know it back quite a ways. And it’s one not like it would reset us back to the 70s either, because that old hardware has been ripped out and replaced by the new stuff, that if you removed it, you know, there’s no fallback for a lot of it, as far as I’m aware. But ASML is an incredible company. And I think you made the point about it has the benefit of being kind of in a safer haven being located in the Netherlands. But still you get all of that power flowing through it. And it’s kind of the enabler of, of TSMC. So like, if you’re an investor and you’re worried about geopolitics, you’re not completely exempt from it with ASML stock, because they rely on Taiwan Semi manufacturing, buying their stuff, but you get a lot of the geopolitical risk removed from the equation. It’s interesting that you pair them up together. It’s a it’s an interesting little contrasting situation, two sides of the same equation. Very, very different geopolitical situations for the two companies.
Krzysztof Piekarski 34:11
Definitely, Nick, if I may add on to this. It’s definitely a pretty interesting time for TSMC at the moment, right? It’s, they’re in a very tricky situation where a lot of their customers are now seeing this kind of geopolitical risk where maybe they might be like, Hey, okay, we’ll give you 70% of our workload. And we’ll probably dish out the 30, another 30% to maybe your competitor, just in case, just in case some of these risk might happen. And we have discussed this Nick before, right on the on our podcast where we are seeing it TSMC being a little bit more aggressive in international expansion. Expect, especially in the past past few past few months, as we are seeing kind of this growth in incentives globally. Here in the United States, right we have the CHIPS act and Europe we’re seeing similar places. expansion in countries like Japan as well. So but it’s a tricky play, right? Because this is a very expensive market and to build these fabrication plants is pretty expensive, is pretty risky in financials one way or another. So I want to say it’s very tricky for TSMC, where they need to kind of be able to ease the risk of their customers mind were like, Hey, we don’t worry, we have these fabrication plants all over the world as well, where you don’t have to worry about that. But then they also have to do it in a way where investors are going to be like, Okay, it’s good that you’re doing that. But let’s be careful with that capex that you’re spending this year or next year or so it’s definitely a tricky time. I wouldn’t say I’m bearish on the company. I’m not I believe this is a strong holding. But there’s definitely some some things to keep in mind when looking at a company like TSMC.
Simon Erickson 35:49
And I’d like to chime in and talk about the risk versus reward continuum. And why both of these companies are outliers to what you would expect to see. Generally as companies get larger and larger, larger market caps more customers, monopolies in their field, that decreases the risk for an investment, right? If you’re talking about a company that’s got more than 50% global market share of semiconductor manufacturing, which Taiwan Semi does, or a company that has 100% global market share in extreme ultraviolet lithography, like ASML does, you think, Wow, super low risk, right? This is a fantastic company.
Simon Erickson 36:29
But again, because of the things that Krzysztof mentioned, they are not super low risk investments anymore, there are so many people that understand, we don’t want to go back to the Stone Age. And these are the two companies that are really controlling the production of of semiconductor manufacturing globally. TSMC is Taiwan Semiconductor, a semiconductor manufacturing that’s in Taiwan, obviously. And they’re trying to branch out in different locations. I think it’s a great point you bring up Krzysztof and how important these companies are, to everything.
Simon Erickson 37:01
It might be the perfect segue for me to chat a little bit more about geopolitical risks in the final segment of this, in addition to everything that Krzysztof did mention, which is very, very true. We have another interesting player in this portion that I want to introduce named Intel, because Intel has been around since the dawn of the semiconductor revolution, right? Since the 70s. And Gordon Moore and Moore’s law, Intel was the company that kind of scaled up computing power, and made it possible for electronic devices and computers. And now cloud computing. And now artificial intelligence. This company has been around for half a century, doing its thing in various capacities. But Intel has also been kind of attacked from all angles. Competitors that are trying to design more efficient chips, like we talked about in the first part of the program, that are trying to control different parts of the process. As we talked in the second segment, we’re trying to manufacture them more efficiently. As we talked about in the third. And somewhere in the middle of all this Intel still continues to be a publicly traded investment opportunity.
Simon Erickson 38:06
And we’ve got to size this up objectively as investors and say, Okay, here’s the Intel 100 billion dollar company right now off of its peak, certainly, it designs its own chips. It’s using a lot of them internally, its own processors, but it’s also kind of opened up this new Intel Foundry Services Group, which is approaching about a billion dollars in annual revenues. And it’s just gotten some nice funding from the United States government. The CHIPS Act has earmarked $50 billion dollars, about $52 billion for the US to be globally competitive, not only in r&d, for semiconductor manufacturing, but also for the capex that’s required for building out these extremely expensive fabrication facilities. And Intel went and grabbed $3 billion immediately to set up a new fab up in Ohio. This could be a mega fab as it’s been described, it could cost over $100 billion when it’s finally completed.
Simon Erickson 39:01
What is Intel trying to do with this? Well, it’s certainly trying to woo American chip makers and chip designers to produce devices on American soils. It’s already going after Qualcomm has already gone after MediaTek. It’s gotten both of those customers on board. It’s continuing to go after the prize here, the Holy Grail, which is Apple, of course, and we will weigh those contracts from Taiwan Semiconductor to produce them in Intel’s fabs. It’s going to be an interesting one to keep an eye on again, Intel is now selling at nine times earnings. So it’s incredibly cheap. It’s got an incredibly long list of problems that it’s facing. It’s got capital constraints. It’s wanting to fund a lot of different things at the same time. It’s laying off a good portion of its workforce right now to free up capital. It’s still got its dividend that it wants to use to keep institutional investors interested. It’s wanting to fund the fabs and it’s losing business and several of its legacy product lines. But on the other hand, we’ve got Pat Gelsinger back at the helm. Again, who really understands he’s been there, he worked with Gordon Moore a long, long time ago, is an engineer by training is a very technical leader that wants Intel to regain its prominence on the global stage. Somewhere in between that, all of that description, there’s either a bullish or a bearish case, depending on how you want to look at Intel. But I’ll open it up at that point, see what you guys think about this one?
Krzysztof Piekarski 40:28
Well, I guess I’ll jump in Simon and say, in that phrase, Chip War, we didn’t really talk about the war part. And when I said that the world runs on ships, that very, very, very much includes the world’s military. And that’s connected to things like basic survival of a country. When I was listening to you talk, Simon, it kind of begins, it becomes very clear that when your own country’s military depends on having the fanciest chips, you will very, very much be incentivized to spend all the money you need to, to build your own stuff at home, as opposed to in your rivals backyard, right? So the the winds, the wind survival is what we’re no longer talking about just toys, say if you want to be diminutive about it, but we’re actually talking about your own country’s military strength, then any company that could say, we will help our nation’s you got to as an investor, we saying, Okay, we need to pay attention to that, right? Because this is not small stuff. And like you were saying Intel has the intellectual capital, still at the company. So even though they had many missteps in the evolution of the industry, I’m not sure it’s wise to count them out. Right when they could very much come back and say we’ll defend our will help our country stay sovereign.
Nick Rossolillo 42:12
I keep dogging on Intel on Jose’s podcast too. And I’m probably going to have I probably have like a mug shot with darts stuck in a in someone’s office at Intel at this point. But I worry about that. Krzysztof, maybe, maybe you can weigh on this. One of the things I worry about is maybe maybe I’ll borrow your illustration of from poker earlier. I feel like at this point, Intel’s like playing for the side pot. TSMC has already, like got the best hand. And like Intel’s playing for like the side pot with Samsung to maybe take second place and third place is likely not going to exist. And they’re behind. So I don’t know. And I worry that even if they do catch up, what we don’t know at this point is because so many countries are all trying to reassure that ship manufacturing as part of this this chip war that’s going on. Even ASML has said in a decade, the industry is going to be facing an overcapacity manufacturing situation. So some of these chip fabs, they could be all scrambling for market share, because governments are doling out the cash for it and saying here bring your bring your your fabs to us that in a decade’s time, will these fabs even be all that profitable like they are right now in this moment in time? So maybe Intel does win that side pot, but what if it’s like pittance. And they’ve they’ve done all of this work and throwing all this money after after a while it’s really not going to be that great of a deal? I don’t know. That’s my that’s my concern with Intel on the geopolitics that they’re playing. Right at the moment.
Krzysztof Piekarski 44:11
Should I want to come to that?
Simon Erickson 44:12
Oh, go ahead. Krzysztof, Yeah, go ahead.
Krzysztof Piekarski 44:15
I think you’re, you’re right. And maybe my counter to the if it’s I’m not sure sure. I could even call it a counter. It is this feeling I have about Intel the value of intellectual capital. And that because this stuff is so extraordinarily complex, that the assumption is if you take the brightest minds, put them all in the same room, might they innovate to the next you know, new things so that they they kind of get out from the they could both theoretically catch up and potentially make something new I think that’s the way I will be thinking of it kind of like what Tesla is starting to do you know, there is no second place. Really, as Elon said yesterday, you could only see second place with a telescope. Well, Intel seems despite failing to take into consideration The Innovators Dilemma from the 90s in the arts is it possible that they could re innovate the fab so that it is in a second best, it actually becomes a world class. It seems like that’s a possibility, right, Simon? From an investor’s standpoint?
Simon Erickson 45:44
So I want to jump in and answer this and nerd out for a little while. So please take a nap for the next 20 minutes if you’re tired, because this will certainly make your eyes glaze over.
Simon Erickson 45:54
But there is an important technical term for anyone listening. It’s called process technology. And this is the IP that goes into manufacturing processes. So super important for companies like Taiwan Semiconductor or Intel, who are actually manufacturing the chips. Samsung and Taiwan Semi right now are the two horse race, or the people at the table holding the aces. Because they have embraced extreme ultraviolet lithography. They embraced ASML lithography machines when Intel did not years ago. And so what happened, they were actually able to make seven nanometer or smaller transistors on their integrated circuits. And they won the most lucrative contracts contracts from Qualcomm, from Apple, from anybody who needed to have as much computing power as possible in their chips, that pushed them to the front of the race. And now Intel, interestingly, is catching back up and say, Okay, yeah, hey, you know, we can’t just keep going on the same pace. We’ve got to take a much more drastic measure if we want to be globally competitive. And guess who’s placed the very first order for ASML is the newest line of high numerical aperture machines that cost $350 million apiece? The first order that will be delivered next year is going to Intel’s newest fabs. So it’s not the Intel in the future of the Intel of the past. To answer your question, Krzysztof, I think they recognize they’ve got to, they’ve got to do something to stay globally competitive out there.
Simon Erickson 47:24
So I think that you know, to keep this short and sweet, we’re right at about an hour short and sweet. In our podcasts. It shows you how much we could talk about this. But we’ve got a collection of companies. And hopefully we helped describe the semiconductor value chain and the different segments and how complex all of this truly is. And to remind everyone listening of everything that we discussed, we’re now going to vote each of us is going to vote just briefly on the 6 companies that we mentioned which of these two, each of our panelists believe is the most compelling investment opportunity. Right now. We are not keeping score. We’re not going to have anything other than the bragging rights for the winner on this. But just to recap, we had Nvidia and AMD both mentioned as chip designers, we had Synopsys, which was the software verification provider. We had ASML and Taiwan Semiconductor as the providers of lithography equipment and the chipmaking manufacturer. And then we had Intel, which does a little bit of everything. Jose, I see in my Zoom screen here you are the farthest on my left, I will start with you which of those six opportunities is the best investment today?
Jose Najarro 48:34
Oh man today, I think my answer would have to be AMD at the moment. I’m a huge growth style investor. And I believe the potential is there. I think though, just quick asterix if you would have asked me a month ago, my answer would have been Nvidia but that company has seen such a crazy crazy run up in just the past 30 days that I think for that reason alone for today, it will be AMD.
Simon Erickson 48:58
Love it. And anyone listening to this podcast, today is January 26 2023. Nick, I’ll come to you next. Which of those six is your favorite investment opportunity?
Nick Rossolillo 49:11
I hate only being able to pick one. We can’t be nuanced here. Okay, well, if I open up my portfolio my money says Nvidia. So that is my top holding as of the moment so if I say anything else, I’m not being honest.
Simon Erickson 49:28
One for NVIDIA. Two votes for the chip designers. Krzysztof who are you’re going to go with as your top idea of the list?
Krzysztof Piekarski 49:34
I’m gonna eat my own cooking Simon. I was so persuaded by my own speech, like oh man I’m really smart [laughs]. When I heard myself say there is one company upon which the entire world depends. I don’t know when investing how many times you get to say the whole world depends on just one company. So ASML. And I’m thinking, you know, in terms of like 20 years, how I’m ignoring the fact that it’s already a huge company, I’m ignoring price per share, I’m ignoring multiples and valuation. And I’m just thinking like, if there is only one and there can’t really as far as like, there really is no way to become a number two, then that’s a moat. Warren Buffett. I don’t know does, right. Does Warren Buffett own ASML? I keep whispering that’s his number one criteria.
Simon Erickson 50:47
Not until he listens to this podcast, Krzysztof! He’s gonna change his mind. So ASML is fantastic. And then last but not least, these are all good companies. And of course, we are at one point in time valuations go up and down on every day in the stock market. But I’m gonna vote for AMD as well, just like Jose. I think Lisa Su has really turned things around. They’re not only with the EPYC CPUs in the data center and the growth rates that they’re seeing there, but that Xilinx acquisition just opens up so many opportunities for FPGAs and custom chips to perform the most demanding operations out there. I’m pretty impressed with that. And that’s gonna be the one that I’m gonna go with.
Simon Erickson 51:25
Gentlemen, this has been a lot of fun. I really enjoyed doing this with you. Thank you to our external guests, Nick and Jose who are together working again on the semiconductor investing and Moore project I really enjoy that. And Krzysztof, you know, you and I do this every month through our 7investing deep dives, where we really knock out the bull and the bear case for every single company that we put on the scorecard. I really appreciate it from every every one of you. Thank you very much for being part of the Semiconductor Roundtable today.
Simon Erickson 51:54
And thanks, everybody, for tuning into this edition of our 7investing podcast. We are here to empower you to invest in your future. We are 7investing!
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