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Knowledge level: Beginner Reading time: 5-6 minutes
Semiconductors are at the heart of modern computers and phones. Also known as microchips, they are the all-important “brains” behind any computer and currently in short supply across the globe. While crucial, semiconductors are complicated. Below we look at five important semiconductor businesses and break down what they do.
1. Qualcomm (Nasdaq: QCOM)
5G phones taking off has benefitted Qualcomm in a big way. Qualcomm is one of the premier microchip designers, with its memorably-named headline product called the “Snapdragon”.
The Snapdragon is one of the strongest smartphone chips used outside of the iPhone, where Apple designs its own microchips for its iPhones. Most high-end Samsung Galaxy smartphones, such as those in their S series, are powered by the Snapdragon. Samsung uses it as it is considered one of the best in class.
What is especially compelling about Qualcomm’s chips is that they are designed in such a way that they can drain less power and generate less heat while driving reasonable computation power. After all, consumers don’t want to buy phones that get hot when they use them.
2. Xilinx (Nasdaq: XLNX)
Pronounced “Zi – Links”, Xilinx is famous for producing what are called “field-programmable gate arrays” (FPGA). Put simply, an FPGA is a flexible microchip that can be changed and reprogrammed.
As an FPGA can be chopped and changed, it can do lots of different tasks. Xilinx has been in the news a lot recently because it is getting acquired by AMD (NASDAQ: AMD), one of the largest semiconductor designers.
This acquisition illustrates two important facts about the semiconductor industry. First, mergers are a big driver of value. Secondly, it pays to be big, given how capital intensive the industry is. On a similar note, Nvidia (NASDAQ: NVDA) is also acquiring British semiconductor giant Arm.
3. Taiwan Semiconductor (TSMC) (NYSE: TSM)
TSMC is a national champion of Taiwan and the biggest company on the country’s stock exchange by far. It also has a dual-listing on the New York Stock Exchange. Based in Taipei, TSMC is the world’s largest factory or “foundry” for semiconductors, producing more than 50% of global supply.
The company has benefited from Silicon Valley chip designers outsourcing chip manufacturing, with its largest client being Apple. TSMC is also at the forefront of continued chip miniaturisation.
TSMC and Samsung make the world’s smallest transistors, which are the gates that control computer code, which allow for more powerful computers and phones. In its most-recent results, TSMC unveiled strong fundamentals, with net margins of 38% and profits growing at 14% a year, as of 30 June 2021.
4. Mediatek (TPE: 2454)
Mediatek is a Taiwanese semiconductor designer, a less well-known Taiwanese chip-making name compared to TSMC, which is always in the spotlight. Mediatek designs an array of chips, for all kinds of electronics, including televisions, phones, and navigation equipment.
The company specialises in producing chips for Chinese smartphones, with Chinese tech giant Xiaomi being a big client, especially under the backdrop of a global shortage in 5G chip supply.
Mediatek has come onto some investors’ radars as a potential acquisition target for Chinese semiconductor factories, dubbed “foundries”. The Chinese government has stated its desire to build a local semiconductor industry and it is heavily subsidising local businesses.
5. SK Hynix (KRX: 000660)
This Korean giant is the second-largest memory chip company after Samsung. Memory chips are crucial as they allow computers to store things and remember them, like saving documents.
Memory chips have two components: random access memory, which stores the data; and printed circuit boards (PCB), which connect the memory to the rest of the computer.
Only three companies in the world make top-quality DRAM chips: Micron, under its sub-brand Crucial; Samsung; and SK Hynix. The two Korean companies, Samsung and SK Hynix, together control about 70% of the market. Among SK Hynix’s biggest clients are Apple, Dell and HP.
How to invest in a basket of semiconductor stocks
ETFS Semiconductor ETF (ASX: SEMI) invests in all of the above stocks. SEMI buys the world’s 30-largest semiconductor businesses, spanning from foundries to designers to equipment makers.
It is the first global semiconductor ETF to list in Australia, utilising a market capitalisation weighted approach, which ensures that the top innovators are well represented, while capping the biggest stocks at 10%. The fund charges a 0.57% management fee and may be traded on the ASX like any other stock.
Interested in learning more about semiconductor stocks? Contact ETF Securities to find out more about ETFS Semiconductor ETF (ASX: SEMI).
To invest in ASX-listed ETFs or any other ASX and US-listed securities, join SelfWealth today for flat-fee $9.50 brokerage and no other account fees or commissions!
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