If You’re Reading This Semiconductors & AI Are Taking Over
In recent years, the semiconductor industry has experienced a notable departure from its traditional cyclical patterns, embracing a more secular behavior that defies the ups and downs tied closely to economic cycles. This transformation can be attributed to a range of factors, including the ever-expanding presence of technology in our daily lives and the surging demand for semiconductors across diverse sectors. Unlike its past volatility, the semiconductor market now exhibits remarkable resilience, driven by long-term trends such as artificial intelligence, Internet of Things, and cloud computing. This shift reflects the industry's capacity to adapt to evolving market dynamics, sustaining consistent demand and fostering innovation even amidst economic fluctuations. (1)
As we continue to ride the wave of technological advancement, semiconductors, and artificial intelligence (AI)—stand at the forefront of this evolution. Together, they drive each other's growth, propelling us into an unprecedented era of technological revolution. As these two domains deepen their relationship, they're heralding a new surge of innovation. The future of AI is anchored in the creation of new, AI-optimized semiconductor chips—a dynamic we believe is poised to fuel significant growth in the next half-decade. This blog examines the interdependence of semiconductors and AI, the technological advancements driving their integration, and the future outlook of this thriving?industry.
How Are Semiconductors Behind ChatGPT’s Success?
Machine learning and its insatiable appetite for data heavily rely on semiconductors for processing and storage. The growing complexity and demand of AI applications mean that semiconductors, particularly graphic processing units (GPUs), are increasingly important. With their multitasking capabilities, GPUs are crucial in managing the massive data required for AI model training, ensuring applications like ChatGPT operate?efficiently.
As the applications grow increasingly complex, the demand for advanced semiconductor chips will escalate. This growing demand represents a significant and promising opportunity for companies in the semiconductor industry. For instance, graphic processing units (GPUs), are the powerful engines that drive companies like OpenAI and its applications, including ChatGPT, are in high demand. With their capability to handle multiple tasks simultaneously and more importantly proficiently, GPUs are the perfect fit for the heavy-duty processing required by machine learning. These processing engines manage the vast data needed for training generative AI models the use generative pretrained transformers (GPTs), enabling quicker responses and better language understanding. Simply put, semiconductors are the foundational support structure, ensuring the smooth operation of AI applications such as?ChatGPT.
GPUs also play a pivotal role in a broad spectrum of AI applications, including:
NVIDIA's Q1’23 Earnings Highlight AI and Semiconductor Market?Capture
NVIDIA (NASDAQ: NVDA) recently posted strong earnings, with both revenue and earnings per share surpassing analyst predictions. The rise in demand for NVIDIA's GPUs, used extensively in AI applications, is driving the company's growth. As the demand for AI-powered applications rises, so will the demand for semiconductors and we believe NVIDIA is well-positioned to benefit from this growth. It is a leading GPU supplier for AI applications and is reaping benefits from partnerships with AI companies like OpenAI and Google?AI.
?Global Semiconductor Market Growth and?Forecast
The need for increased computing power, AI, and digital connectivity has resulted in significant semiconductor market growth. McKinsey estimates that semiconductor revenue could double from $550 million in 2022 to over $1 trillion by 2030.
Is AI Accelerating Semiconductor Design and Manufacturing?
AI is not just benefiting from semiconductor power; it has emerged as a significant driving force in the evolution of the semiconductor industry. Through its ability to redefine chip designs, identify defects, optimize processes, and predict chip failures, AI is enhancing efficiency and profitability within the sector. And there's more to the story—AI is catalyzing the creation of a new lineage of chips tailor-made for AI's distinctive requirements and needs. These aren't your regular chips, but one’s tailor-made for AI's unique demands. Think of Intel (NASDAQ: INTC) and its pioneering work crafting AI-optimized chips that excel in speed, efficiency, and power?management.
AI Beats a Human at Chess and Go, Now Watch It Design?Chips
Chips have exponentially more configurations than chess or?Go(2)
AI has previously proven its capability by outperforming humans in complex board games like Chess and Go, but now it's stepping into an even more intricate field: chip design. With an astronomical number of potential configurations, far surpassing those in Chess or Go, the ability to optimize and innovate in chip design could be a game-changing application of AI technology. As the relationship of AI and semiconductors deepens, they're paving the way for a fresh surge of technological innovation. The forthcoming progression of AI is heavily dependent on the creation of new semiconductor chips that are specifically designed for AI applications. We believe this trend is likely to fuel significant growth in the next five?years.
AI Design Tools’ Growth Rate Projected to Surpass Chip Sales by 3x?
5-year CAGR for chips, EDA tools, and advanced AI design tools (2023-2028) (3)
AI's imminent growth largely hinges on the development of semiconductor chips optimized explicitly for AI functionality. According to Deloitte, it is very plausible that this factor can trigger substantial growth over the next?half-decade.
Semiconductor Industry Interlude: 4 Key Categories of?Participants
The semiconductor industry is principally composed of four key categories of participants. The initial category comprises foundry operators, for instance, Taiwan Semiconductor Manufacturing Company (TSMC). These are businesses that undertake the production of semiconductor chips based on the specifications given to them by other companies. They can be thought of as factories crafting chips for different companies. The second category is filled with integrated device manufacturers (IDMs), with companies like Intel serving as examples. IDMs are unique because they handle the entire lifecycle of a semiconductor chip within their own facilities, from the initial design to the final manufacturing phase. The next category includes companies that only design chips also referred to as fabless companies. NVIDIA and Advanced Micro Devices (AMD) fall into this category. Fabless companies concentrate on designing and developing semiconductor chips but outsource the manufacturing to foundry operators since they do not have their own fabrication capabilities. The final and fourth category encompasses equipment manufacturers such as ASML. These businesses are responsible for creating the necessary machinery and equipment used in the manufacturing of semiconductor chips. They supply the crucial tools needed for both foundry operators and integrated device manufacturers to construct the?chips.
领英推荐
How Will US CHIPS Act Benefit Large Semiconductor Producers?
Remember the US CHIPS Act? Since Semiconductors are critical for the economy, the U.S. aims to become self-sufficient in semiconductor production and reduce dependence on foreign supply chains. The Covid-19 pandemic highlighted vulnerabilities in the supply chain, often including steps in over five countries and multiple global shipments. The Department of Commerce reports that in 2021, semiconductor shortages cost the U.S. economy nearly a quarter trillion?dollars.
To increase domestic manufacturing semiconductors, the US Chips and Science Act will channel $50 billion in investments into the industry over five years, including $11 billion for advanced semiconductor research and development, and $39 billion to accelerate and drive domestic chip production ($6 billion of which can cover direct loans and loan guarantees).
Budget To Expand Domestic Manufacturing (Advanced Semiconductor R&D and Chip Production)
Among the main beneficiaries of the US CHIPS Act are the U.S.’s large semiconductor producers. Instead of trying to pick individual stock winners in the sector, investors can gain exposure to the 25 largest most liquid, U.S. listed semiconductor companies in the?VanEck Semiconductor ETF (SMH).
In closing, we believe semiconductors are the 'picks and shovels' way to play the AI landscape and present a compelling way to capitalize on the growing AI sector, particularly when direct access to private AI companies is limited for many investors.?The VanEck Semiconductor ETF (SMH)?provides a way to invest in the entire value chain of the semiconductor industry, from chip design and fabrication to the machinery used in the manufacturing process. As semiconductors are the essential components that power AI innovation, we believe they are poised to gain value amid the potential deflationary impact of AI's efficiency—they also provide a unique opportunity to ride the wave of AI's transformative?impact.
Article authored by Nick Frasse , Associate Product Manager.
Still haven't joined us on LinkedIn? Keep up with our latest news and insights by following us.
To receive more?Thematic Investing?insights,?sign up in our subscription?center.
Important Disclosures
Nvidia Corp is 17.00 of SMH net assets as of?5/31/23
Intel Corp is 4.65 of SMH net assets as of?5/31/23
Taiwan Semiconductor Manufacturing Co is 11.21 of SMH net assets as of 5/31/23
Advanced Micro Devices Inc is 5.91 of SMH net assets as of 5/31/23
Asml Holding Nv is 5.17 of SMH net assets as of 5/31/23
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other?employees.
An investment in the VanEck Semiconductor ETF (SMH) may be subject to risks which include, among others, risks related to investing in the semiconductor industry, equity securities, special risk considerations of investing in Asian, European and Taiwanese issuers, foreign securities, emerging market issuers, foreign currency, depositary receipts, medium-capitalization companies, issuer-specific changes, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and industry concentration risks, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. Medium-capitalization companies may be subject to elevated?risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a?prospectus and summary prospectus, which contains this and other information, call?800.826.2333?or visit?vaneck.com/etfs. Please read the?prospectus and summary prospectus?carefully before?investing.
??Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates?Corporation.
?? ?? ??