As the world becomes smaller and smaller, domestic bias isn’t just about investing in companies found in your native countries. It’s also about investing in the world’s most powerful brands. For semiconductor brands, few stand out more than Intel (INTC), a company that may have been dethroned by NVIDIA (NVDA), but still packs a punch when it comes to branding. One of the most frequent questions we’ve been receiving on our YouTube channel is whether Intel is a good investment? Our paying subscribers have also been raising various semiconductor stocks, so let’s start by coming up with a universe of semiconductor stocks to provide exposure to the explosive growth of semiconductors predicted by the MBAs over at Gartner.
The semiconductor industry surpassed $500 billion for the first time in 2021, according to Gartner. It’s predicted to double to $1 trillion by the end of this decade.
Gartner via Intel
Investing in Semiconductors
What people are really asking is if semiconductors are a good investment. To find the domain of semiconductor companies, we can use the MSCI / S&P 500 Global Industry Classification Standard (GICS) classification system which identifies two subsectors for semiconductor companies – 45301010 Semiconductor Equipment and 45301020 Semiconductors.
Semiconductor equipment provides a pick-and-shovel play on semiconductor growth, while companies selling semiconductors are pure-plays on the evolution of various technologies such as FPGAs, graphic chips, and IoT chips. In reality, these two broad categories oversimplify the complexity to be found in a mature industry that’s evolving at the speed of Moore’s Law. Various types of semiconductor companies include:
- Silicon wafer manufacturers
- Shin-Etsu Chemical, SUMCO
- IDM or Integrated Device Manufacturers
- Foundries – companies that manufacture chips
- Taiwan Semiconductor Manufacturing Company or TSMC
- Fabless (designs chips, outsources manufacturing)
- Semiconductor test equipment
- Design software
- Solar equipment
We’ve always been inclined to invest in pick-and-shovel plays such as software-as-a–service (SaaS) design software or testing equipment. If you’re building a product or service that all the world’s largest semiconductor companies use, then who cares which semiconductor technology is ahead at any given time? This brings up a good question – who are the world’s largest semiconductor manufacturing companies?
The Largest Semiconductor Manufacturing Companies
One of MSCI’s most popular products is a data feed that contains most the tradable stocks in developing and emerging markets along with useful data points such as the GICS classifications discussed earlier. Since no retail investor will spend upwards of $50,000 to obtain such information, the best option is to look at ETFs that cover a particular sector, then download the list of constituents to see who the players are. ETF.com provides a comprehensive database of ETFs that lists three names with assets under management (AUM) above a billion dollars that provide exposure to semiconductors.
The first two ETFs focus on providing coverage for the largest U.S. traded semiconductor stocks out there, each using a different benchmark. Despite a dramatic difference in asset weighting, each ETF contains 14 of the same names under the top-15 constituents as seen below.
The VanEck ETF chooses to include a software company that services all major semiconductor companies, Synopsys, and a name we looked at before in a piece titled Invest in Many Types of AI Chips With One Stock. Like Mobileye, it’s a stock we might consider holding if we weren’t overweight the semiconductor industry already with NVIDIA as our largest tech stock position with a weighting over 10%.
Finding the Best Semiconductor Stock
You’d have a hard time finding a semiconductor stock that’s performed better than NVIDIA over the past several decades. Below you can see NVIDIA’s performance benchmarked against the VanEck Semiconductor ETF and popular Nasdaq tracker ETF QQQ. (Notice how the semiconductor ETF actually underperformed the Nasdaq over twenty years):
We’ve been fortunate enough to do quite well with NVIDIA. Just based on the shares we trimmed during 2021 alone, we recovered our cost basis more than seven times over, while it remains our largest position (we were trimming as recently as last month). Looking back at why we chose to invest in NVIDIA could provide some insight into how we might choose the best semiconductor stocks going forward.
Our entire NVIDIA thesis was based on AI hardware, though the company’s heavy exposure to gaming – and for a while, cryptocurrency – only provided more tailwinds for growth. These days, we’re primarily interested in the growth of their data center segment as way to play the big data theme.
So, to find great semiconductor stocks, perhaps it’s best to start with a semiconductor-related theme, and then identify a leader in that space. For example, Mobileye is a great way to invest in autonomous driving hardware as they’ve emerged as a leader in this space. ARM appears to be a leader in IoT chips, but now that NVIDIA failed to acquire them, a consortium led by Qualcomm appears to be next. Solar hardware also falls under the semiconductor umbrella, which means investors need to consider their exposure to semiconductors more holistically.
The best semiconductor stock for our portfolio would be a company with a market cap exceeding $10 billion as we’re already overweight small and mid-caps.
Other investors might look to invest in “smaller” semiconductor companies noting that NVIDIA came out of the IPO gate in 1999 with a market cap of around $600 million. Since the two ETFs we’ve talked about primarily cover large cap ETFs, perhaps the third – the SPDR S&P Semiconductor ETF (XSD) – might provide some names with lots of growth potential ahead. Below you can see the size breakdowns for the three largest semiconductor ETFs.
In a future article, we’ll dig into some of the names provided in XSD – along with names raised on our Discord Server by paying subscribers – to see if we might tease out anything interesting. But even if we do, we’re not planning to add anymore semiconductor exposure because we’re already well overweight (and after the holidays, in more ways than one.)
Our Exposure to Semiconductors
Our 38-tech stock portfolio already has a meaningful amount of exposure to the semiconductor industry with our largest holding being NVIDIA with a 10.55% weighting. We’ve written extensively about the company over the years and find their growing exposure to data center hardware to be quite appealing.
NVIDIA is an obvious play on semiconductors, but digging a bit deeper we find two more names that provide semiconductor exposure in our portfolio – Teradyne (TER) and SolarEdge (SEDG) – which means our total exposure to the semiconductor industry sits at around 17%. Consequently, we don’t see the need to increase our exposure, but would instead look to identify firms we might invest in were we to exit NVIDIA. If you’re wondering when that might be, we covered that topic in an article last year titled The Right Time to Sell NVIDIA Stock in which we said the following:
Growth continues to shine for NVIDIA, and our thesis hasn’t changed at all, so there’s really no reason to sell right now.
Nanalyze – February, 2022
That sentiment changed quite quickly when NVIDIA saw revenues plummet over the last two quarters on weakness in gaming and professional visualization. Our plan is to wait for Q4 Fiscal 2023 results next month at which time they’ll likely give some guidance for Fiscal 2024 (analysts are expecting 10% revenue growth). Provided we continue to see double-digit revenue growth, there’s sufficient reason to believe that growth hasn’t stalled yet, but there’s also an opportunity cost to hold such a large position in a company that’s reached maturity such that they’re returning money to shareholders through dividends and share repurchases.
Should we decide to sell out of our NVIDIA position in 2023, then there will be plenty of dry powder to use for adding some replacement semiconductor exposure. Some names on our “like” list include Synopsys and Mobileye. In coming articles on the semiconductor theme, we’ll review some small caps subscribers have raised, and perhaps revisit Mobileye and Synopsis as potential investments in place of NVIDIA. As usual, Nanalyze Premium annual subscribers will be alerted via email to any trades we make.
As For Intel
As for our readers and subscribers wondering about investing in Intel (INTC), take a step back and ask yourself what you’re looking for. If you want some nice safe exposure to semiconductors, pick up one of the low-fee ETFs we talked about today (SMH lower risk, XSD higher risk). If you’re trying to cherry-pick a winner, don’t base your decision on branding. If you can’t describe what exactly Intel does these days, why would you want to invest in the company?
The 2022 Intel Investor Meeting had the CEO spelling out to the investment community their planned return to greatness. Overwhelmed by the deluge of acronyms and fluff words, we finally came across a slide that made sense – Intel’s plan to growth their business over the next three years.
We’re not interested in legacy Intel growth, what they’ve listed above as “traditional.” It’s the emerging segments we’re interested in, and that’s where the appeal falls flat. If we want to invest in Mobileye, we’ll buy shares of the company. The AXG segment represents growth they expect to achieve at the expense of companies like AMD and NVIDIA that are already dominating the graphics chip niche. Intel is clearly playing catch up, something that goes against our pursuit of niche leaders. As for Foundry, that’s just a return to American greatness in semiconductor manufacturing, a vision being powered (at least in part) by the current administration. Given they’ll be competing against entrenched competitors like TSMC, we don’t find the thesis very compelling, unless of course the red dragon goes over and takes a crap on Taiwan, then all bets are off.
Conclusion
Information technologies move very fast. NVIDIA could easily find itself becoming the next Intel by missing whatever emerging niche provides growth during the next decade. To find the “best” semiconductor stock, start with finding emerging niches you want exposure to, then search for a leader. Companies that are playing catch up – like Intel – are swimming against the current. For those with less of an appetite for risk, you can’t go wrong with the VanEck semiconductor ETF, but there’s no guarantee you’ll outperform the broader Nasdaq index.
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