Look for ASML To Exploit New Semiconductor Cycle
There was an earthquake in the semiconductor world on Tuesday, and it involved Intel Corp. (Nasdaq: INTC). The implications are big.
Intel will invest $20 billion in two new Arizona manufacturing facilities and start making chips for other companies. New CEO Pat Gelsinger wants to remake the chip giant completely.
While this certainly won’t solve all of Intel’s problems, it’s huge news for the overall industry and there’s a way investors can play this trend.
It’s true that Intel is in a bind. Something has to give. The company fell way behind in developing cutting-edge chips under previous CEO Bob Swan. Not only did design lag — the company product managers couldn’t get their act together to fabricate the chips. It was a complete mess. Now, the company wants to make chips for other companies, too.
Unfortunately, developing chips isn’t easy or cheap. Also, it’s not like competitors such as NVIDIA Corp. (Nasdaq: NVDA), QUALCOMM Inc. (Nasdaq: QCOM) and Advanced Micro Devices, Inc. (Nasdaq: AMD) are sitting around waiting for Intel to catch up. They are continually designing and contracting to fabricate next-generation chips.
Moreover, they have an advantage. They’re fabless. Unlike Intel, they are not burdened with expensive fabrication facilities that are subject to yield problems and rising equipment costs.
There is another problem. Even as Intel decides it will make chips for other companies, the entire world is slowly moving away from Intel’s x86 architecture.
Amazon.com, Inc. (Nasdaq: AMZN) started fitting its hyperscale data centers with processions built with the ARM Holdings architecture, according to a December 2019 report from ZD Net. These chips, popular in all of the world’s smartphones, offer real power-saving advantages. Now, big companies with deep pockets are adapting them for other applications.
Apple Inc. (Nasdaq: AAPL) unveiled its power-sipping M1 chip in December. The new silicon running inside the latest MacBook Air laptop won rave reviews. Worse for Intel, the chip blows away its best silicon for Apple laptops. In my opinion, it’s only a matter of time before Dell Technologies Inc. (NYSE: DELL) and the rest follow Apple’s lead with custom ARM silicon.
Intel is changing its business model to make chips for other companies when the firm can’t even make enough processors meet customer demand. Its hyperscale data center and computer clients are moving away from Intel architectures. And the company is years behind competitors with state-of-the-art chip designs.
There is a silver lining for investors, though.
In January, Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE: TSM), the world’s leading chip contractor by sales, announced plans to spend $28 billion on new facilities. The entire industry is awash in capital chasing new semiconductor equipment.
And that means opportunity. Enter ASML Holding N.V. (Nasdaq: ASML).
ASML Holdings makes the advanced lithography systems used to print circuit boards onto silicon wafers. The Dutch semiconductor equipment company controls 90% of that market. This includes all of the big customers like Intel, TSM and Samsung. The windfall in spending at the big-chip makers is great news … yet that only tells half of the story.
Related Post: Why NVIDIA Is a Better Bet Than a Broken-Up Intel
The other part is the democratization of chip design. As companies like Apple begin to design chips to meet the needs of specific applications, this will mean more customers for ASML and better pricing power.
The company reported in January that sales rose to 14 billion euros in 2020, up 18% year-over-year. Gross margins expanded to 48.6%, up from 44.7% in 2019. And profits shot up to $3.6 billion, a gain of 38%.
The semiconductor world is changing. It’s hard to say if it will all work out for Intel, but other players in the industry will certainly benefit. Intel has a mountain of problems that a pile of money will not fix. That said, it’s the beginning of a spending spree for the equipment needed to make those new chips.
Savvy investors should consider buying ASML, a company with a new monopoly in lithography systems.
Jon D. Markman