Everyone’s favorite stock market, technology, has followed in the footsteps of the dodo. Oil and value stocks are in rage.
But part of the technology – semiconductors – is vital not only to the technology sector in the stock market but also to the global economy and industries from cars to computers. The development, relocation and manufacture of chips and chip makers will remain vital.
I recently sat down for the Six Five Summit with Arvind Krishna, IBM CEO,
In the conversation, a remark was shared about how closely the semiconductor industry is related to GDP growth.
As technology, and more specifically semiconductor companies, grows, GDP grows. And the development of technology depends almost 100% on the development of semiconductors. So, as we enter a prolonged winter for technology and growth stocks, it seems wise to watch the growth of semiconductors closely.
While forecasts vary, McKinsey places the semiconductor industry growth in a multibillion-dollar industry by 2030 based on what the consulting firm estimates was 6% to 8% annual growth and about 2% annual price growth – it all depends on return of equilibrium in supply and demand.
Several trends in semiconductors require investors’ attention, from the ongoing supply chain problems that have played a significant role in today’s unprecedented inflation to the profits and growth of major semiconductor companies such as Intel INTC.
and Taiwan Semiconductor TSM,
Perhaps one of the most important trends to look out for is the semiconductor ecosystem in general and what drives a wave of new entrants to chip manufacturing, from computers to servers. In particular, the emergence of the Arm as a newcomer to semiconductor manufacturing is creating competition for incumbents such as Intel and AMD, who have long enjoyed the unique advantage of holding x86 keys, which account for more than 90% of computer chips. and most server chips as well.
Wrapping Arm around the world
Antitrust problems halted Nvidia’s acquisition of Arm. But the concerns, which came mainly from some of Arm’s biggest users and franchisees, are a strong indication of the expected role that Arm will play in the future in powering everything from smartphones to supercomputers.
Last week at WWDC, Apple AAPL,
announced its M2 Macs, made at the company’s domestic silicon. The first iterations of the company’s Arm processor were problematic. However, Apple has taken huge strides in its chip-making efforts and is beginning to find its way in helping Arm reach almost 10% of the computer volume.
It’s too early for Qualcomm computer companies, but it is worth noting that the company gained a talent and IP power with the acquisition of Nuvia. Qualcomm also made a big bet on Arm with Windows for Snapdragon offers. The first Nuvia-based chips are expected in early 2023 to utilize the Arm and will likely find their way into projects such as Lenovo, Microsoft MSFT,
Samsung and other OEMs already use Windows on Arm PC.
Arm also sees strong adoption from the data center and server side. AMZN of Amazon,
AWS was the first cloud scale provider to make a big bet on Arm with Graviton presences. At this point, Arm accounts for 20% of AWS server deployments. A report from Trend Force said that by 2025, Arm would have about 22% of all server growth – a significant market share in just a few years. The success of AWS has undoubtedly been catalytic, along with a growing trend of separating workload from monolithic designs of other super-scales, such as Microsoft’s Azure, Google GOOG,
and Oracle ORCL,
everyone is looking to make home silicon.
The troubles of AMD and Intel
As you read about newcomers to the field, it is easy to think that this could be bad for AMD and Intel. And, of course, to varying degrees.
Intel has faced its share of challenges by trying to convince the market that it has a strategy that will bring it back to its glory days. I tend to think the market was extremely tough for Intel, but it came from a series of historical events that may require a “show us, don’t tell us” mentality among investors.
That said, CEO Pat Gelsinger has been aggressive in retrieving Intel’s best version of itself, and has done so through expansion. The arm will be part of it.
Intel Foundry Service (IFS), which I believe can play an important role in resolving long-term supply chain issues, will be part of the Arm-based manufacturing solution. The company’s IDM 2.0 strategy also points to a future where its silicon hybrid could contain not only x86 but chiplets containing x86, Arm and Risc-V.
At AMD’s recent investor day launch, the company shared its new $ 300 billion Total Addressable Market (TAM) as it continues to diversify the business. Intel, Nvidia and Qualcomm have massively expanded their TAMs, mainly based on continuous diversification into new markets, while benefiting from strong demand growth and price elasticity for chipmakers.
Much of the company’s strategy seems to offset Intel’s continued gaining market share. However, the recent $ 35 billion acquisition of Xilinx also deepens its roots in Arm, adding growth and diversification of just x86.
Winners and losers
The short answer is yes, which is why existing players are migrating to an Arm leverage position.
If Intel can really make its foundry business buzz, it should be a winner in the field – even if it surprises some people.
Superconductors will all be able to build silicon to meet the needs of their customers using the Arm, which will give businesses more options. All but surely they will bring ultimate profits to companies like AWS, Google, Microsoft, Oracle and Alibaba BABA,
Apple has integrated vertically and has made chip manufacturing a responsibility. There was reason to doubt it, but at this point, the company is building quality products that meet the needs of its users and can expand its profit margins and even better control its supply chain.
In the field of computer, Arm will create more variety and variations. It will stimulate competition and give more options to OEMs for differentiation. I like Qualcomm here, as the company knows how to build and license chipsets perhaps better than any other company in the world – Nuvia-based solutions will be vital to that.
And, of course, the biggest winner of all is Arm. As the company prepares to go public, it has nothing but stable growth forecasts and a world-class customer list based on its IP.
“Budget protected line item”
In short, what I think IBM Krishna was trying to reflect in his comment on the semiconductor / GDP correlation was twofold. First, any slowdown in semiconductor growth should raise big, red flags for investors and the economy as a whole. And second, the key to tackling much of the expected economic contraction will depend on continued investment in technology infrastructure and software that enable businesses to operate more efficiently and expand productivity.
Perhaps his most profound statement on our sit-down was: “Technology is the most protected budget line”, in relation to the macroeconomic challenge and the way in which the best companies intend to take a more defensive stance, while remaining focused on growth and innovation.
Almost everything works with semiconductors – and almost any innovative tactics we can follow to optimize business and consumer activity will depend on semiconductors. If the growth of semiconductors accelerates, so will the economy – and we will have to root for either x86, boom or any other available command set.
Daniel Newman is the lead analyst at Futurum Research, which provides or has provided research, analysis, consulting or consulting to Nvidia, Intel, Qualcomm and dozens of other companies. Neither he nor his company owns shares in listed companies. Follow him on Twitter@danielnewmanUV.