Who ate all the chips? Taking a closer look at the semiconductor supply chain.

by Máire Lane, PhD & Joseph Gunderson, Invesco Canada

Supply chains have rarely been in the public consciousness as much as they are presently. In particular, the shortages afflicting the global semiconductor supply chain have been common fodder for headlines this year. The pandemic shutdowns and spiking demand from the sharp economic recovery has strained even the most sophisticated, resilient supply chain. But for semiconductors, there is a flourishing underlying trend that is driving the shortages and pushing investments all through the industry.

We can see by the array of products that are being delayed due to semiconductor shortages just how widespread their use has become — from cars to robotic vacuum cleaners to dog-washing booths. Even something as simple as a light bulb can have semiconductor content built into it. For example, connected light bulbs, controllable from a smartphone app, have become increasingly common in new homes.

This dynamic is part of what we mean when we talk about our “Big Compute” investment theme. In the Invesco Global Opportunities Class, we’re invested in a number of different companies across the semiconductor supply chain that we believe have the technological leadership to help meet the demand for chips across this broad spectrum of sophistication and use cases.

PVA TePla is a German company that makes the furnaces to grow silicon ingots. These ingots are then sliced to make the wafers of silicon that are the foundation of just about every computer chip out there. They recently received an order from a top-five silicon wafer manufacturer that is significantly expanding its manufacturing capacity in Singapore.

Meanwhile, Applied Materials is an American company that makes semiconductor manufacturing equipment, which takes those silicon wafers and adds the transistors that do the computing. Its CEO has spoken about strong demand continuing for many years. He is forecasting half a trillion connected devices and reiterates that semiconductors have strategic importance for national security reasons.1

This increase in demand is being driven not just by a wider array of end industries, but also by the much greater need for computational power that businesses and consumers demand. As computing has moved from mainframes to PCs, and now to servers and data centres, each successive step has required more and faster processors.

The internet has been one of the most important innovations in human history, enabling us to share information nearly instantaneously across the world. The websites on which we rely are hosted across a vast array of servers and data centres; they are everywhere their customers need them to be. Cloud computing and the delivery of software through the internet is an important trend, as is the delivery of movies and videogames.

What are clouds made of? The answer: Chips.

The “cloud” can be a bit of a nebulous concept for people to grasp, but it’s important to remember that in order for the cloud to exist, it needs physical hardware as well. The racks of servers in data centres around the world that support cloud computing are vital bits of infrastructure that ensure all of the technology used in our daily lives runs smoothly.

Consumers are insatiable in their demand for more data, faster. It’s now expected that whatever website you visit will pop up instantaneously, and whatever criteria you punch into a search engine will deliver results faster than you can blink. To get to this point, and to reduce lag time even further, data needs to be housed in more servers, connections to that data need to be faster, and information needs to be more accessible. To do all of this, you need more and better chips to do all of the computing, render the graphics, and facilitate the lightning-fast information transfer we all expect to see.

This dynamic is another key part of our “Big Compute” theme, and we think Advanced Micro Devices (also known as AMD) could be a major beneficiary. AMD is one of our largest and longest-held positions in the fund. We’ve owned AMD since the early 2000s, and have seen its transition from a struggling also-ran to its current position as perhaps the most innovative designer of CPUs in the world.

This company operates in several important areas related to the Big Compute theme, from providing the advanced chips that power cloud computing data centres, to the graphical processors necessary for the most immersive video game experiences, and more recently into the area of 5G smartphone service through the acquisition of Xilinx2, formerly a competitor. AMD’s advanced chips are also used for things like cryptocurrency mining and artificial intelligence research. No matter how the future of computing plays out, we’re confident that AMD will remain an integral part of this important structural growth theme.

Speaking of 5G, we don’t think there’s any company better positioned to potentially benefit from the rollout of this next generation of wireless service than Qualcomm. This San Diego-based company was a pioneer in the 2G generation of cell phone technology back in the 1990s; its patented code-division multiple access (CDMA) technology became the standard adopted by the entire industry, and the company’s stock was one of the best-performing of that decade.

Over the years, Qualcomm has continued to innovate and now has a significant intellectual property portfolio related to 5G standards. They put out a prototype 5G modem chip in 2017, which was able to create the first-ever working 5G data connection, demonstrating mobile internet speed of 1 Gbps. The first smartphones with Qualcomm’s 5G technology incorporated into them were sold in 2019, and they have partnership deals with nearly every major mobile device manufacturer to license their technology. As the structural trend toward the faster mobile data speeds provided by 5G technology continues, we think Qualcomm could be a major beneficiary.

“Can you hear me now?” asks the light bulb

Nordic Semiconductor is a Norwegian company that specializes in Bluetooth connectivity through ultra-low-power chips, which are going to be needed for the half a trillion connected devices — nobody wants to have to change all those batteries! Even connected to the electric grid, when one has 50 connected devices in their home, they need to be low power users. Nordic Semiconductor allows for these connected devices to send and receive information over cellular networks or using Bluetooth, and they ship more than one million Bluetooth LE (Low Energy) chips every day.

The bottom line

We invest in companies that we think have years of transformational growth ahead of them. To achieve the growth potential we look for, it helps to have the tailwind of a powerful demographic or technological trend behind you. In the case of companies that operate within our Big Compute theme, we believe they should be well-positioned to help our clients achieve their investment objectives in the years and decades to come.

1 Applied Materials, “2021 Investor Meeting Prepared Remarks,” April 6, 2021

2 Xilinx is not an Invesco Global Opportunities Class holding.

This post was first published at the official blog of Invesco Canada.

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