Semiconductors are like the brains of the computer world. They control the flow of electricity and allow all our modern devices to function. Without semiconductors, there would be no televisions, laptops, phones and all the rest. But semiconductor companies can be a bit obscure, highly specialised and unknown to the general public.
The companies listed below are all found in the ETFS Semiconductor ETF (ASX Code: SEMI).
Taiwan Semiconductor (TSMC)
TSMC is a national champion of Taiwan and the biggest company on the country’s stock exchange by far. Based in Taipei, TSMC is the world’s largest factory or “foundry” for semiconductors, producing more than 50% of global supply. The company has benefited from Silicon Valley chip designers outsourcing chip manufacturing, with its largest client being Apple. TSMC is also at the forefront of continued chip miniaturisation. TSMC and Samsung make the world’s smallest transistors, which are the gates that control computer code, which allow for better more powerful computers and phones. Their fundamentals are very strong, with net margins of 38% and profits growing at 14% a year, as of 30 June 2021.
The Dutch giant, now one of the largest companies in the world, and often called “the most important company that no-one has ever heard of”. ASML makes the machines – called EUV lithography, in industry jargon – that put transistors onto microchips. They have a monopoly on these types of machines, with no competitors anywhere close to being able to produce a replacement. According to the New York Times, China is trying to create a workaround to ASML’s lithography machines, after President Trump banned their export to China. However, ASML is so advanced that it will take at least 10 years, the NYT indicates. Their lithography machines cost US$130 million, making them some of the most expensive machines in the world.
Nvidia makes graphics processing units, or graphics cards (GPUs). These are like super advanced computer chips that allow many detailed processes to be run at the same time. GPUs started out as mostly of interest to video gamers, as superior GPUs made for better graphics on PlayStations and PC games. However the use of GPUs has widened quite dramatically in the past 10 years, and now includes bitcoin mining but perhaps more interestingly artificial intelligence. As GPUs allow many computations to be run in parallel, they are needed for AI.
Advanced Micro Devices (AMD)
AMD is king of the corporate comeback. It was near bankrupt five years ago, but staged a massive turnaround and now produces the best central processing units (CPUs) on a performance per dollar basis, overtaking Intel. Ryzen, which is the name of one of AMD’s CPUs, has become increasingly popular in personal computers. But perhaps more importantly, AMD’s processors are becoming the preferred choice for data centers, helping AMD claw ever greater market share. On this score, Google Cloud recently tapped AMD to produce the processors for its servers.
“Virtually every leading-edge device has been made using our equipment”, the website for Lam Research reads. And it is exactly right. Building semiconductors is extremely difficult as the air has to be so pure you cannot breathe it; else dust will ruin the chips. And because microchips are so small (transistors are just 3 nanometres) all the measurements must be precise at an atomic level. In this setting, Lam provides the equipment that puts the conductive metals onto the microchips. It also provides the “etching” equipment, which essentially cuts microchip pieces into the right shapes.