Semi-known Semiconductors For AI Exposure

Semiconductors have been around for decades and yet within the last few years they have dominated every major headline, why is that? Well, there are a few reasons…

• Emerging technologies such as AI, autonomous systems, robotics, 5G etc. are all reliant on the processing power of chips and will only go as far as semis allow;

• The CHIPS act passed by congress in 2022 brought a lot of attention to the U.S.’ efforts to bring back domestic semiconductor production by funding north of $50 billion in research, design, and manufacturing; and

• The semiconductor supply chain is massive , enabling hundreds of companies to tap into the profits being generated. A clear example of this is the semiconductor ETF (SMH), which has surged over 600% since 2017.

Semiconductor production is so vast and specialized that a single product could cross international borders up to 70 times before reaching the consumer . However, it hasn’t always been like this. Integrated device manufacturers (IDMs) that design, manufacture and test all of their own products used to be much more common, especially for analog chips. With advanced logic chips that are becoming the backbone of emerging technology, companies have found ways to specialize certain steps along the supply chain to cut costs.

There are many well-known stocks available to investors that provide access to this powerful technological revolution, such as Nvidia, Broadcom, and AMD. However, in this article, we aim to identify some lesser-known companies that make up the enormous supply chain of the global semiconductor industry. Remember, the folks who made the most profits during the gold rush in the 1850s were the ones who sold the picks and shovels…

Design

The design is the start of the supply chain . This is where new products are conceived to meet the customer's demands. As the supply chain has become more specialized, businesses have adapted to only creating the designs for the chips and outsourcing the manufacturing. These are known as  fabless companies . 

Examples of fabless companies include Cirrus Logic (CRUS) , Qualcomm (QCOM) , Marvell (MRVL) , and Lattice Semiconductor (LSCC) . Our focus is on Cirrus Logic due to its impressive fundamental and technical scores in our MOTR Ranks . Despite the market's early August slide, CRUS is already making new highs, indicating strong leadership within this industry group. Prior to the early August slide, our models had systematically identified the 107-112 area as an attractive buy zone.  

IP & EDA

Chip designers use Electronic Design Automation (EDA) software and license reusable intellectual property (IP) blocks, known as core IP, to streamline the creation of complex circuits. This approach saves time and resources, allowing for greater focus on innovation while making the job easier for manufacturers once the design is in their hands.

These companies profit as intermediaries between designers and manufacturers by building up their portfolios of core IP and EDA tools. Notable examples include Arm Holdings (ARM) , Cadence Design Systems (CDNS) , and Synopsys (SNPS) . Arm Holdings focuses on IP for processor designs and dominates the mobile processing industry, providing the basic infrastructure for most cellular devices. Cadence excels in analog/mixed-signal design tools and offers specific IP solutions. Synopsys holds a strong position in EDA tools, boasts a vast IP portfolio, and is expanding its focus on security. Due to the diversification they’ve achieved, we’ve decided to highlight SNPS and present some key support and resistance zones on the chart.

Manufacturing

Now that the design is complete, the manufacturing process can begin. From materials and equipment to the actual fabrication (manufacturing), there is no shortage of companies that have an influence.

Materials

Linde (LIN) is a global industrial gasses and engineering company that has integrated itself into the semiconductor industry. They supply high-purity gasses essential for the semiconductor fabrication process and provide solutions to ensure compliance with environmental regulations. The chart has set up very well over the last few months and appears ready to go higher.

Equipment

Nova (NVMI) designs and manufactures process control systems used in semiconductor fabrication around the world. They specialize in metrology platforms that monitor measurements throughout the manufacturing process, which is integral to the precision needed in semiconductors. Similar to CRUS, Nova has experienced a strong rally after the August slide (+45% from the lows) and is now facing resistance at all-time highs. As long as support holds, we will stay bullish on NVMI.

Foundry

Foundries are specialized factories where semiconductors are manufactured. Fabless companies, which focus solely on designing chips, outsource their production to these foundries, which exclusively handle the manufacturing of chips for various designers.

BAE Systems (BAESY)  is certainly an intriguing choice to spotlight as a foundry, given that it is typically recognized for its defense and security solutions. However, in December 2023, BAE Systems received the first funding announcement under the CHIPS Act to enhance their Microelectronics Center (MEC). The MEC is known for producing advanced semiconductors that aren't available commercially and stands out as one of the few defense-focused wafer foundries operated in the U.S. We have outlined the support levels below to help assess potential investment considerations.

ATP

Assembly, Testing, and Packaging (ATP) is the final stage before a chip is integrated into finished products. Since the 1960s, the U.S. has outsourced most ATP efforts due to its high labor and low value-added nature. However, with the rise of advanced packaging, a technique used to improve chip communications, and the funding from the CHIPS Act, ATP in the U.S. has become increasingly appealing to companies.

Amkor Technologies (AMKR) provides semiconductor ATP services and is in the process of constructing a $2 billion advanced packaging and testing facility in Arizona. This growing segment of the supply chain not only enhances chip performance but also represents a significant opportunity for the U.S. to reshore more of the semiconductor industry. Per usual, support and resistance zones are highlighted below.

While industry giants often dominate semiconductor discussions, potential sleeping giants are waiting to be discovered across the entire supply chain. As the industry continues to grow and evolve, stay informed by subscribing to MOTR Research for timely and actionable insights, posted weekly!