In our increasingly digital world, semiconductors – which allow the control of electrical signals – are essential to almost all the innovations that are improving our lives. These building blocks of modern technology power everything from artificial intelligence (AI), cloud computing, and autonomous vehicles to consumer electronics, industrial automation, and cutting-edge defence systems.
Given semiconductors’ centrality to modern life, there is a constant race to develop chips that are ever more powerful and efficient – which in turn fuels further advances. So the semiconductor sector is a crucial enabler of global innovation.
How the chips lie …
At present, growth in the semiconductor industry is being driven by a broad range of innovative industries. Undoubtedly, the most talked about is AI. Advanced AI models require exponentially more computing power, which has created unprecedented demand for high-performance chips.
There’s also the trend towards electrification and automation. The automotive and industrial sectors increasingly depend on high-performance chips to facilitate advanced processes – all with the aim of delivering efficiency.
Another key area is data. In our Information Age, the storage and retrieval of data are crucial considerations. Volumes of data are exploding, so cloud storage – which relieves the pressure on physical infrastructure – is increasingly important. The big players here are ‘hyperscalers’ – the companies that run cloud services for corporate and institutional clients. These firms are investing heavily in advanced semiconductors to ensure that their clients can continue to scale up their operations indefinitely.
And then there are the concerns about the semiconductor supply chain, which have arisen as the geopolitical situation has become increasingly tense. Governments and companies alike are prioritising the resilience of their semiconductor supply chains – leading to significant investment in domestic production. This is a serious undertaking: building semiconductor ‘foundries’ is an extremely challenging process given concerns about site location, water supply and workforce skills, among others.
Key players
At Orbis, we focus on finding companies trading at a discount to their intrinsic value. Sometimes those are ‘deep value’ stocks, but sometimes they are world-class businesses with strong competitive advantages and clear potential for long-term growth. This is no different when it comes to semiconductors – an area where we prefer three companies with very strong industry positions.
The first of these is Taiwan Semiconductor Manufacturing Company (TSMC). This company is the undisputed leader in manufacturing advanced microchips. Its cutting-edge semiconductors are in huge demand for AI, smartphones, and cloud computing.
At present, it is benefiting from heightened demand for leading-edge nodes (the processes used to produce the smallest and most powerful chips) for customers including Apple, Nvidia, and AMD.
Another of our favoured investments is Micron Technology. This US company is a leader in DRAM and NAND memory chips – critical for AI processing, data centres, and high-performance computing. Micron Technology is well placed to capitalise on the AI-driven demand for high-bandwidth memory. This is an essential component for next-generation AI workloads.
An enduring evolution
This year’s big development in AI is the emergence of China’s DeepSeek large language model. DeepSeek has demonstrated efficiency gains and technological advancements - at significantly lower costs - that could reshape the competitive landscape in generative AI. Its big breakthrough is better performance with lower use of power. The DeepSeek team appear to have achieved this through optimising algorithms to reduce the computational burden. Given the growing constraints on semiconductor supply and energy use, this could be a meaningful opportunity for various companies participating across the semiconductor value chain.
The optimisation of AI models means that future semiconductor demand may focus on power efficiency and computational speed. This will create new cycles of innovation in the industry – and those best placed to profit will, again, be companies with technological leadership and advantages of scale and expertise.
More broadly, more efficient AI models may speed up the pace of AI adoption – leading to much more widespread use and, overall, greater demand for the technologies that make it possible – of which semiconductors are the most essential.
Given their staggering range of applications, semiconductors remain a compelling investment theme in the market today. For us, this is a high-conviction, long-term growth story that rests on what we believe to be a powerful and enduring long-term growth path. Through our investments in companies like TSMC and Micron, we achieve exposure to a vast array of new and fast-evolving industries – along with the security that comes from investing in long-established businesses with high barriers and deep moats, trading at attractive discounts to what we believe they are truly worth.
Eric Marais is an Investment Specialist at Orbis Investments, a sponsor of Firstlinks. This article contains general information at a point in time and not personal financial or investment advice. It should not be used as a guide to invest or trade and does not take into account the specific investment objectives or financial situation of any particular person. The Orbis Funds may take a different view depending on facts and circumstances.
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