Big names and niche players
It’s a brave move to bet on a turnaround at A return to industry leadership looks a long shot. Still, the firm is positioned to benefit from growing protectionism. Western governments will increasingly insist that chips destined for military and other sensitive applications are manufactured in the west. That could create rather a cosy berth for Intel, even if the chips fade into technical mediocrity. On a price/ earnings ratio of 10 the shares are astoundingly cheap for a US tech stock.
Broadcom (Nasdaq: AVGO) is also intriguing. This designer of chips for wireless systems stands to gain from the 5G rollout. Broadcom is that rarest of beasts – a tech giant that acts like a FTSE dividend stock. It is highly cash generative, quarterly payouts have grown rapidly over the past decade, and the shares are yielding almost 3%.
TSMC (NYSE: TSM) is the pick of the foundries. No other firm can match its enormous capital spending, which gives it a solid moat against any rivals hoping to eat its lunch. The main risks are geopolitical. Trouble in the Taiwan Strait could make last year’s chip shortage look like a walk in the park.
designs chips that are ideal for the booming areas of artificial intelligence and cloud computing. That’s reflected in a price/ earnings ratio of 72. The firm seems set to abandon its bid to buy mobile chip designer ARM (see page 10), which may be an attractive option if ARM’s owner Softbank responds by disposing of it through an initial public offering (IPO).
Dutch lithography giant ASML (Amsterdam: ASML), Europe’s star semiconductor business, has cornered the market in extreme ultraviolet (EUV) lithography. It’s a one-of-a-kind stock and that’s reflected in a p/e ratio of 52. Sales are forecast to grow 20% this year.
Germany’s Infineon (Frankfurt: IFX) and Franco-Italian STMicroelectronics (Paris: STM) specialise in automotive and power semiconductors. This is a growth area thanks to electric vehicles (EVs). STMicroelectronics provides cuttingedge silicon carbide technology to Tesla, but Infineon is snapping at its heels.
Investors can also look at some of the less well-known firms that support the industry. Lam Research (Nasdaq: LRCX) sells specialist equipment to help chip manufacturers improve production yields and reduce defects. Applied Materials (Nasdaq: AMAT) provides many of the non-lithography tools needed to make microchips. Longtime competitor Tokyo Electron (TYO: 8035) should benefit from similar trends. Singapore’s UMS Holdings (SGX: 558), which supplies tools to Applied Materials and Intel supplier AEM (SGX: AWX) are much smaller stocks that also stand to gain from a rise in capital spending.
A few ETFs offer broad exposure to the market. These include Lyxor MSCI Semiconductors ETF (LSE: SEMG) ,an ESG-screened fund with an ongoing expense ratio of 0.45%, and VanEck Vectors Semiconductor ETF (LSE: SMH), on an ongoing expense ratio of 0.35%.