Generative AI (artificial intelligence) has dominated the semiconductor conversation this year. But while the technology has enormous potential in this space, there are also lots of opportunities elsewhere in the semiconductor sector.

Industries like automotive, healthcare, pharma, education, transportation and professional services are all being impacted by a shift to a digital world, and that means more chips to power machines, run software applications and monitor the world around us.

Microchips (another term for semiconductors) are becoming increasingly vital in the modern world, and demand will only increase in the future.

Take automotive, for example. It is estimated that a modern non-electric car is installed with something like 1,000 chips, compared to up to 3,000 in an average electric vehicle. Tesla cars are believed to include nearer 3,500 even after efforts to reduce chip requirements during supply shortages a few years ago. They control safety, security and access systems, powertrain and electrical systems, and comfort, infotainment and connectivity applications.

So, while Nvidia (NVDA:NASDAQ) has emerged as the dominant chip designer for AI, there are multiple alternative investment opportunities in the wider chips space.

New industry drivers

- 5G/6G

- Cloud computing

- AI

- Electric vehicles

- Smart cities 

EXAMPLES OF RELEVANT COMPANIES

US chip giant Qualcomm (QCOM:NASDAQ) is a major supplier of vehicle-to-everything (also known as V2X) chips and is in talks to acquire Israeli firm Autotalks. V2X can help improve traffic management and road safety, as well as helping to reduce carbon emissions.

The deal will require EU approval ‘to ensure that customers such as original equipment manufacturers or infrastructure managers retain access to V2X technology at competitive prices and conditions,’ the European Commission said in a statement in August 2023.

Intel (INTC:NASDAQ) CEO Pat Gelsinger is engineering a massive project to enhance the company’s core PC central processing unit and computer server offerings, with the company ready to roll out its Meteor Lake PC chips later in 2023. In 2024, Intel will introduce its next-generation Granite Rapids and Sierra Forest server CPU units.

In June 2023, the company reached an agreement to spend $32.8 billion to build two new manufacturing facilities in Magdeburg, Germany, already dubbed the nation’s ‘Silicon Junction’.

It’s also worth noting that public-private chip-manufacturing deals point to a geographical shift as increasingly fractious technological battle lines are drawn between China and the West.

TRANSFORMING HEALTHCARE

Elsewhere, UK chips architecture design champion ARM (ARM:NASDAQ), which in September rejoined the stock market with a listing in the US, is helping to power the transformation of Saudi Arabia’s healthcare system.

In tandem with clinical stage biotech Nano Cures, ARM will establish a fabrication plant to manufacture logic chips, while an advanced microprocessor design centre is expected to be established in the Kingdom’s smart city, Neom.

Infineon Technology’s (IFX:DE) chips are used by a range of industries, including healthcare, automotive and manufacturing, and can be found in internet of things devices. The German semiconductor maker’s goal is ‘to be the leader in power systems,’ according to CEO Jochen Hanebeck.

‘With our strong portfolio geared at the long-term trends of decarbonisation and digitalisation, we are addressing the right structural themes,’ Hanebeck told analysts on the Q3 2023 earnings call in August.

Infineon is also currently leading the EU-wide Listen2Future project, launched in February, which will develop ultrasound sensors that can be used in the medical field, such as for detecting heart disease. Medical devices can transform the early diagnosis, treatment and monitoring of health conditions.

While medical devices account for less than 1% of the total chip market, it’s vital that the healthcare sector benefits from a ramp up in semiconductor manufacturing, because a shortage poses a risk to patient health.

To mark the first anniversary of the US CHIPS and Science Act, which was signed on 9 August 2022, the medical device trade body in the US, AdvaMed, reminded president Joe Biden’s government that medtech should not be forgotten when it comes to securing supplies of chips manufactured domestically.

The trade body has also published a strategy outlining six priorities to help the US strengthen its supply chain resilience. This includes a long-term prioritisation of semiconductor chips and critical components for medtech devices and stresses the need for public-private partnerships.

AI CHIPS WITH EVERYTHING

Such developments mean circling back to AI, which promises to get smarter and become essential as devices, not just in healthcare but across various industries, and that will require more advanced semiconductors.

Nvidia has teamed up with US medical device developer Medtronic (MDT:NYSE) to embed its AI healthcare platform Clara into endoscopy devices with the aim of improving clinical decision-making, patient care and outcomes.

‘We believe that collaborating with AI companies and developers like Nvidia is essential to driving innovation within the medical device industry,’ said Giovanni Di Napoli, who runs the gastrointestinal business at Medtronic.

Christopher Gannatti, global head of research at WisdomTree, puts Nvidia’s runaway success down to a combination of ‘great messaging, great marketing, great vision and amazing technology,’ but it is important to remember that it relies on contract manufacturing to turn its intellectual property into physical chips.

So, despite all hoopla surrounding Nvidia and its stunning share price rally in 2023, it’s worth noting that Taiwan’s TSMC – short for Taiwan Semiconductor Manufacturing Company (TSM:NYSE) – remains the largest semiconductor manufacturer in the world, producing an estimated 60% of the world’s chip supply and more than 90% of the most advanced chips.

SEMICONDUCTOR PICKS & SHOVELS

Earlier in the year TSMC’s share price reflected that dominance, with its US-listed stock up nearly 45% in June. The last three months have been another story, as China’s economic woes and government intervention in free markets lowered sales expectations and dragged the share price down.

TSMC’s revenues were up 6.2% on a monthly basis in August, prompting Wedbush analyst Matt Bryson to call the performance ‘a good start’ to the new quarter, even as China reportedly banned iPhones for government workers. Any expansion to such a ban could hurt TSMC’s share price as the company is a big supplier of chips to Apple (AAPL:NASDAQ) hardware.

Morningstar analysts cover a range of stocks in the semiconductor space, and recent analysis found many trading near fair value or undervalued, yet most have deep and wide economic moats.

Dutch lithography equipment manufacturer ASML (ASML:AMS) has one of the deepest and widest moats of all, so while it only ranked fairly valued at the time, the company and stock continue to be viewed favourably by Morningstar.

‘As the largest and most advanced supplier of photolithography equipment, the company exhibits considerable scale and technological superiority relative to its competitors,’ said analyst William Kerwin. ‘Its technical expertise and large R&D budget serve as barriers to entry,’ and while competitors do exist (Kerwin name-checked Nikon and Canon), these have substantially less capacity and technical merit.

USING TRACKER FUNDS TO INVEST IN CHIPS

Now could be a good time to back semiconductor stocks, with 2024 set to be a big year for the sector. Data from Yardeni Research shows consensus revenue and earnings growth estimates for S&P 500 semiconductor stocks in 2024 pitched at 17.4% and 37% respectively.

Even if we factor in the potential skew of Nvidia’s rampant expansion – 45% revenue and 50% earnings growth next fiscal year (to January 2025), according to Koyfin – plus its $1 trillion market cap weighting, investors could still see better returns from this sector than the overall market during the next 12 to 18 months.

Over three, five and 10-year periods, the S&P Semiconductor Select index has generated annualised total returns of 19.7%, 23% and 23.9% a year, respectively. That is roughly double the benchmark which is the S&P Composite 1,500 index which covers approximately 90% of the market cap of US stocks.

The S&P Semiconductor Select index has endured just two down years (2018 and 2022) over the past decade to 31 December 2022.

While chip stocks make up 4% of the S&P 500 index, they represent 16% of the Nasdaq 100, so owing a fund that tracks the performance of the latter index may be enough for many investors seeking exposure to the sector. Alternatively, there are plenty of other options either via individual stocks or from specialist funds.

SEMICONDUCTOR ETFS

Website JustETF lists 85 technology themed  funds listed on the London Stock Exchange, most of which will have some exposure to                            the sector.

For example, the Amundi MSCI Semiconductors ESG Screened UCITS ETF (SEMG) seeks to track the MSCI ACWI Semiconductors & Semiconductor Equipment ESG Filtered index, a collection of large and mid-sized companies across 23 developed
and 24 emerging markets that are active in the chips space.

The £106 million fund’s largest holding is Nvidia at 27.6%, followed by TSMC (11%), Broadcom (9.2%) and ASML (6.8%). It has a 0.35% ongoing charge. There is a dollar-denominated version under the code SEMU.

Alternatively, the VanEck Semiconductor UCITS ETF (SMGB) is much bigger at £757 million, and while it includes all of the big names mentioned above, it also holds stakes of more than 5% of assets in Qualcomm, Advanced Micro Devices (AMD:NASDAQ), Texas Instruments (TXN:NASDAQ) and Intel. It is a much more concentrated option, tracking just 25 stocks compared to the Amundi ETF’s 70. The ongoing charge is also 0.35%.

HSBC Nasdaq Global Semiconductor UCITS ETF (HNSS) claims to be the only London-listed ETF that tracks the Nasdaq Global Semiconductor 80-company strong index, and has the same 0.35% ongoing charge.

The HSBC Nasdaq Global Semiconductor ETF offers exposure to all of the big names previously mentioned, with Nvidia again its biggest stake at just under 9% of assets. But this is a much smaller fund, with around £20 million of assets under management, largely because it was only launched in January 2022.

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