AI and the rebirth of the semiconductor industry

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Published: Mon 17 Apr 2023, 1:40 PM

Have you been following the stock market lately? If you had, you would notice that on a year-to-date* basis, NVIDIA's share is up 88.9 per cent while shares of Monolithic Power Systems and Taiwan Semiconductor have gained 38.1 per cent and 21.9 per cent, respectively.

By Arun Leslie John

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All of this indicates that the semiconductor industry has got its mojo back despite the global supply chain crisis. One of the major factors that can be attributed to this uptick is the emergence of artificial intelligence (AI) and how the semiconductor industry attempts to capitalise it.

How are AI chips revolutionising the semiconductor industry?

In today's digitally dependent world, it is surprising that semiconductor businesses can’t capture the complete PC and mobile markets despite seizing nearly 20 per cent of their total value.

With the increasing use of AI, semiconductor businesses are given an opportunity to get more value from the technology stocks. After all, technology hardware stocks require AI capabilities, especially in its memory and sensor fields.

Moreover, plenty of AI applications require specialised end-to-end solutions. This will give ample opportunities for the smaller companies that manufacture niche products to capitalise by addressing customer pain points related to storage, memory, and specialised computing needs. In fact, reports suggest that AI-related semiconductor businesses are likely to account for nearly 20 per cent of all its demand and bring in $67 billion to the industry.

No wonder there has been a rise in new chip startups and venture capital funding, with Deloitte Global predicting venture capital firms investing more than $6 billion in semiconductor companies in 2022.

So even as AI rules the digital world, it is becoming even clear that software is great, but hardware is the true enabler. As per Grand View Research, the global AI market is forecasted to hit $1.81 trillion by 2030 at a CAGR of 37.3 per cent from 2023 to 2030, and hardware is its foundation.

The reaction of global players

Seeing how AI is transforming the semiconductor industry, there has been a chip arms race between tech giants seeking to revolutionise everything from creating more innovative and smarter technologies for smart homes to enhancing cloud computing.

Apple, Google, among other tech-giants, have started heavily investing in AI research, development, and implementation, in areas of big data analytics and deep learning. Meanwhile, South Korean electronics manufacturer and chipmaker, Samsung, have further raised its capital expenditure to recover from the gap between their excess inventory and consumer demand.

However, at this juncture, the current incumbents – Intel, NVIDIA (NVDA), and Qualcomm – appear to have much to benefit from.

Analysts have already upgraded their ratings for tech companies, with Barclays improving their ratings on chipmakers Advanced Micro Devices, Qualcomm, and Seagate Technology on expectations that the sector will unlikely revisit multi-year lows reached in October 2022.

However, the biggest beneficiary appears to be NVIDIA, making it a compelling watch for AI-focused investment portfolio. NVIDIA holds nearly 95 per cent of the AI chip market, thanks to its A100 that powers cutting-edge AI applications, including the popular ChatGPT.

The growth of Microsoft-backed OpenAI's chatbot, ChatGPT, has been phenomenal. To put it in perspective, last year, in November, it had one million registered users in just five days. This was by far the fastest-growing consumer application in history. In two months, it would garner more than 100 million users. The excitement is well-founded, as ChatGPT allows for human-like conversations and can assist you with tasks like composing emails, essays, and code.

Analysts at both Wells Fargo and Bank of America stated NVIDIA as one of the biggest beneficiaries of the Chat-GPT-induced AI hype. So, as ChatGPT further develops, it will add more users to its database and need more memory capabilities and computing powers to answer queries.

Further, NVIDIA is capitalising on AI growth by unveiling a new cloud-computing initiative. Jensen Huang, CEO at NVIDIA told the Wall Street Journal, "Generative AI's versatility and capability has triggered a sense of urgency at enterprises around the world to develop and deploy AI strategies."

The truth remains that AI has the potential to create value for businesses of semiconductor companies and expand the chip industry’s Total Addressable Market (TAM). From research to chip design, from production to sales, the possibilities exist and must be further explored. For an industry that was reeling under pressure last year, the emergence of AI has given its shine back.

Hence, from a long-term perspective, an investor looking to allocate assets with AI-exposure can keep a close watch on NVIDIA, Microsoft, Alphabet, to name a few.

*Prices and performance as of markets close on Thursday, April 6, 2023.

Arun Leslie John is the chief market analyst at Century Financial.

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