Chipmakers are at an exciting and highly uncertain inflection point right now. 5G technology is just beginning to ramp-up, and datacenters giants are starting to hyperscale again as demand for cloud technology swells in the face of the global pandemic. Chipmakers are facing supply chain issues with economic shutdowns across the globe, but investors are hoping this remains a short-term problem.
Both the Trump administration and US-based semiconductor businesses are working to reduce their reliance on Asian-based manufacturers for the fabrication of their integrated-circuits. The US government is in talks with chip pioneer, Intel (INTC - Free Report) , and Taiwan Semiconductor Manufacturing Co. (TSM - Free Report) , the largest and most innovation-focused chip fabricator in the world, to set up cutting-edge manufacturing plants in the US.
US-based Intel is on board, but TSMC isn’t making any decisions before weighing all of its investment options. TSMC is the real jewel, making up over 50% of the world’s chip manufacturing (foundry), including the most innovative US semiconductor businesses like Nvidia (NVDA - Free Report) , AMD (AMD - Free Report) , Qualcomm (QCOM - Free Report) , and Broadcom (AVGO - Free Report) .
TSMC is the only contracted foundry that can produce integrated circuits that are 10 nanometers or smaller, making them the only option for innovating semiconductor companies that require best-in-class fabrication. If TSMC chose to open a manufacturing plant in the US, it would mark a huge win for US chipmakers.
TSMC is a powerhouse in the foundry space and will continue to drive growth with its unmatched scale and capabilities. This foundry has etched its name into the 4th industrial revolution as the backbone of the hardware space. With its critical partnerships with the largest hardware companies in the world, you are hedging your bets with TSM shares.
I see TSM as a buy today. The resurgence in chip needs for 5G and cloud computing positions this stock to ride the digital chip wave in the coming years. The stock is trading at a reasonable price for long-term investment, and its 2.5% dividend yield provides a robust cushion for this already low volatility stock.
AMD and Nvidia are the two most innovative chipmakers on the market today, and their share prices have reflected this. These two companies are positioned to benefit from the pandemic and the ‘new normal’ that follows.
NVDA is up over 32% for 2020 thus far. The markets are pricing in the stay-at-home tailwind that is boosting both short-term and long-term outlook for the company. Gaming chips still make up most of the businesses topline. With video game giant Activision Blizzard (ATVI) blowing through already lofty engagement expectation out of the water, it would only make sense that Nvidia’s new line of GeForce graphics cards would also see an uptick.
The firm is also working on building out its cloud-based gaming platform, GeForce Now, for the next generation of mobile gaming. GeForce Now allows users to benefit from Nvidia’s best-in-class GPUs without having the hardware locally. This technology requires a fast internet connection and will continue to gain traction as 5G infrastructure rolls out.
The future of Nvidia is in its datacenter GPUs. Nvidia has pushed the capabilities of its hyper-fast GPU technology to levels that consistently amaze analysts. These GPUs are leading the development of deep learning & AI and being utilized by all major cloud providers. This segment has seen a compounded annual growth rate of 53% over the past 3 years, and this is only going to continue as the necessity for AI development becomes more pronounced.
Nvidia technology is being utilized in 5 out of the top 10 fastest supercomputers. The firm’s chips are also becoming integral in the development of VR/AR as well as autonomous driving. The capabilities and consistent innovation being driven by Nvidia are unmatched, and the company is undoubtedly going to be a digital chip leader in the 4th industrial revolution.
Analysts have been upgrading NVDA on the rare tailwind that this pandemic has provided its gaming and datacenter segments. These shares are trading at all-time highs surging past $320 in today’s trading. I would not suggest chasing this rally but would consider buying if these shares fell back below $300 (would love to see a pullback to $250, but not sure if that will happen).
AMD has taken advantage of the evolving chip market, as it attempts to undercut the cost of Nvidia’s cutting-edge GPUs and gains market share in the CPU market as Intel experiences supply chain & manufacturing issues.
AMD’s Ryzen is competing with the integrated-circuit pioneer, Intel, and as of late appears to be winning the battle. AMD’s computing chips provide users with better performance per dollar, but Intel still controls the premium CPU space.
On the GPU side, AMD can’t hold a light to Nvidia as far as performance goes, but they still provide the value proposition. AMD gained momentum in its graphics segment when it won the contract to produce GPUs for the next generation of gaming consoles from Microsoft (MSFT) and Sony (SNE). The Xbox Series X and the PlayStation 5 are expected to be released in Q4 of 2020.
I am not a buyer of AMD at its current rich valuation because of its secondary positioning in both the segments it operates in. Investors and analysts are betting on AMD’s CPU chips, taking a progressively larger market share from the legacy player, but there is a lot of uncertainty when you are competing with an innovative giant the size of Intel. Intel has the long-standing relationships and corporate ties that will take AMD years (if not decades) to establish. Intel has the capabilities and capital to blow past AMD. It is now just a matter of execution.
I would buy INTC with its 2.2% dividend and legacy relationships before I would touch AMD’s stretched valuations. I am typically a growth-oriented investor, but in this instance, I am sticking with the value name, INTC.
The 5G rollout and increased reliance on cloud-computing have innovative semiconductor stocks rallying hard off their lows in March. This pandemic has shown society just how much easier technology has made life. There is a lot of pent up demand for cutting-edge hardware, and well-positioned semiconductors will reap the benefit. My semi-pick is the consistently well-positioned foundry stock, TSM.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
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