With tech giants such as Meta, Microsoft and Amazon reporting robust earnings recently, the spotlight has turned to the semiconductor sector and its elite group known as the “Magnificent 7”. The rise of groundbreaking technologies, especially AI, strengthens the belief that we are on the cusp of a semiconductor golden age, with the most exciting developments yet to unfold.
The industry is becoming prime ground for strategic stock selection as it welcomes new winners and bids farewell to the underperformers. Such a dynamic setting rewards comprehensive analysis and strategic foresight, as identifying the potential front-runners from the stragglers will enable investors to leverage the changing growth trajectories in the sector.
We are keeping in mind the “ABCs” of the semiconductor industry when navigating investing in this area for the years ahead.
AI, the New Growth Catalyst
Generative AI is rapidly becoming a central growth catalyst within the semiconductor sector. Known for its ability to autonomously generate content and solutions, it’s increasing the demand for an array of high-performance semiconductors. While GPUs have been the mainstay for general purpose AI training, custom ASIC chips provide unmatched efficiency and are specifically designed for diverse AI applications. Samsung’s latest handset, the Galaxy S24 Ultra, offers a glimpse into the future of AI in smartphones and how demand for low-power AI mobile and memory chips will grow. This is setting the stage for the next stock pickers’ paradise in 2024 – 25.
Bottoming out on the Horizon
The semiconductor sector is poised for a strong recovery after the supply shortages caused by the COVID-19 pandemic and subsequent overproduction. After an 18-month correction phase, inventory levels are normalizing across the market. Leading the charge in this upcycle are the AI and HPC (high-performance computing) sectors, with the PC and Memory sectors expected to bolster growth momentum in 2024 – 25. Global semiconductor sales are estimated to hit US$588 billion this year, a 13% increase from 2023 and a 2.5% rise over 2022's record figures.1
Capital Intensity Driving New Opportunities
As global trends shift toward increased deglobalization amid heightened geopolitical tensions, governments in the U.S., Korea and Japan are offering incentives to boost domestic semiconductor production. Industry leaders are actively enhancing their supply chain capabilities in various regions in response. Taiwan Semiconductor Manufacturing Company (TSMC) is establishing manufacturing plants in Japan, Germany and the U.S., cementing its leadership position. The move toward nearshoring and reshoring is sparking a surge of new fab construction, which spells additional revenues for equipment manufacturers like ASML. SEMI forecasts that the global sales of semiconductor manufacturing equipment will reach a record US$124 billion in 2025 (boasting a 75% increase from 2020), fueled by capacity expansion, new fab projects and the demand for advanced processing technologies.2,3
ASML
ASML has earned its place as the undisputed leader in the field of advanced semiconductor machine lithography. Starting in 1984 as a joint venture between Philips and Advanced Semiconductor Materials International (ASMI), ASML initially operated from a simple shed in Eindhoven, Netherlands. Over the years, it has evolved into an industry powerhouse, crucial to the production of nearly every modern semiconductor chip.
ASML's lithography systems are at the core of chip manufacturing, imprinting complex patterns onto silicon wafers with exceptional precision—a critical factor for the performance and efficiency of final semiconductor devices. Its revolutionary Extreme Ultraviolet (EUV) lithography technology utilizes extremely short wavelengths of light, allowing for the creation of tiny, densely packed features on semiconductor wafers.
Commanding 80% market share in semiconductor lithography, ASML’s machines are indispensable to industry giants such as Intel, Samsung and TSMC for the production of cutting-edge microprocessors and memory chips. ASML’s next-generation High-NA (numerical aperture) lithography tools improve chip functionality, performance and efficiency. Priced at up to US$380 million per machine, ASML stands as the world's top semiconductor chip equipment maker by revenue.
The company's unique position and the vital nature of its technology have positioned ASML to maintain its leadership role. ASML participates in research consortia like IMEC in Belgium, has strategic alliances with suppliers (such as Zeiss for optics) to ensure high-quality components within their machines, and engages in joint R&D programs with its customers to tailor its systems to specific needs. These have all helped to reinforce ASML’s position as a linchpin of the global technology landscape for years to come.
