[00:03:28] Nicholas Rossolillo: But I bought on Semi, which at the time was a very commoditized manufacturer of power management chips. Yeah, I’ve been buying chip stocks for a while. I’ve always been interested in electronics, and so when I started investing, I got interested in semiconductors.

[00:03:45] Rebecca Hotsko: Yeah. So I wanna dive into a ton of the stocks that you’re interested in today, but first, I think it’d be super helpful to just go through an overview of the industry as a whole because today our economy can kind of be described as a chip economy because microchips have been applied to so many technological advancements and different industries.

[00:04:04] Rebecca Hotsko: So can you walk us through a brief overview of the semiconductor industry? How big of a market is it today, and which sectors use the most chips?

[00:04:14] Nicholas Rossolillo: Yeah, it’s massive, and I think we’re at a really interesting inflection point in the economy right now. So obviously, semiconductors are not new. They were invented like 70 years ago, but we’re reaching this point in time where I think they’re coming out of the office. Historically, you have maybe like an army of office workers using computers and maybe they have some computing network shoved in a closet somewhere, but we’re reaching this interesting point where both the power of the chip, or I should say the computational power of the chip, is increasing to a point intersecting with the affordability of that computing power where it now makes sense for all [00:05:00] sectors of the economy to start using semiconductors. It makes sense for every sector, every industry, and again, not just office workers using computers, using PCs, actually embedding those chips into daily operations. So it could be an energy or a utility company. It could be a medical company that wants to connect its medical equipment to a network. Obviously, electric vehicles and the smartification of the car, of the cockpit, of the car. So all of these different things kind of happen all at once, and the demand for chips is skyrocketing. So I’ll throw some figures out here. Some pre-pandemic figures: 470 billion was the global purchase of chips, the chips themselves, back in 2018, and I start with 2018 because 2019 was actually a down year, if you remember the US-China trade war. And fast forward today in 2022, global chip sales were just shy of 600 [00:06:00] billion. So it’s a huge, huge market. That’s again, just the chips themselves, excluding a lot of the software, a lot of the equipment, the raw materials, excluding all of that, just the chips themselves, almost 600 billion, and it’s on its way to 1 trillion a year. Some estimates point to it being maybe 1.3 trillion every single year by 2030.

[00:06:24] Nicholas Rossolillo: So if you’re looking for a growth industry for the next seven, eight years, that’s a compound annual growth rate of seven to 10%, depending on if you want to use the 1 trillion or the 1.3 trillion estimate. That’s a huge market. So that’s broad. A broad overview. So you asked about end markets as well, didn’t you?”

[00:06:48] Nicholas Rossolillo: “Yeah, for sure. You can get them to that. Yeah. You had, you had this chart here that was a really nice visual showing. Smartphones actually are currently the largest market for semiconductors currently. Smartphones passed up to the PC last decade as the largest consumer of chips. So again, remember office workers, historically the users of computers, but then everybody became a user of a computer every single day, sometimes every minute of every single day, depending on how addicted we are to our smartphone. But in the next decade, I think there’s a growing anticipation that data centers will become the largest consumer of semiconductors. So data centers being the main computing unit of the cloud. Of the cloud. And there’s some different things we might get into later as to why that is, but those are the biggest end markets. Currently, smartphones, PC, data centers, and servers.

[00:07:47] Rebecca Hotsko: I wanna dig into the growth in, or the expected growth in sectors in a second. I first wanna ask you about the different types of chips, because I think that’ll help us grasp this overview of the industry. What are the main types of chips?

[00:08:03] Nicholas Rossolillo: Basically there’s two broad types of chips, analog and digital. So an analog chip, you can almost think of it as just basically a sensor. Maybe if you want to compare it to how our bodies work. Our five senses, an analog chip, is kind of like that. It might be a type of chip that reads a radio wave, so that would be like a mobile device or it could be a power chip.

[00:08:28] Nicholas Rossolillo: That somehow interacts with or alters the flow of electricity through a computing system. It could be lidar or radar or a vision chip. A lot of new cars are getting these to help enable some advanced driver systems. Or maybe it’s an industrial robot that uses one of these analog chips. So again, just think of it like a sensor and kind of like how our five senses help us interact with the world, the physical world around us.

[00:08:53] Nicholas Rossolillo: That’s an analog chip for a computing system. And then the second broad type of chip is a digital chip. And so a digital chip works with ones and zeros. So you could compare these to like the brain, our brain. And so within a digital chip you also have two basic types. You have logic and memory. So memory, it stores information for later use.

[00:09:14] Nicholas Rossolillo: And then logic, it crunches the numbers, it’s figuring stuff out. And so the language that these things use are ones and zeros or bits, and those are completely meaningless, but you have countless ones and zeros lined up together, and that’s kind of like the most basic alphabet for software code. So, that’s a digital chip.

[00:09:32] Nicholas Rossolillo: And oftentimes these are like the most recognizable names, these digital chips. So like your Intel, primarily a digital chip, a designer and manufacturer. Nvidia, AMD, both design digital. Micron is the top designer and manufacturer of memory chips in North America. So some very name brand types of companies fall within this digital chip segment of the industry.

[00:09:57] Rebecca Hotsko: And then, which of those two chips is the market expected to grow the most? Like which has applications to, I guess, which industry? 

[00:10:06] Nicholas Rossolillo: That’s an interesting question. So over the last decade, it has most definitely been the logic chip, especially the digital logic chips. More so than memory. And memory’s kind of a different topic I think we’ll touch on later. But Nvidia, now the world’s largest semiconductor company as measured by market cap, had massive growth over the last decade from logic.

[00:10:31] Nicholas Rossolillo: The world has this insatiable demand for these logic chips, and I think the ChatGPT viral piece of software here the last few… kind of, I think illustrates it’s not necessarily a new thing, but for the first time, I think a lot of consumers got introduced to AI behind software like ChatGPT, which is a computing system designed by Nvidia, or at least the heart of the system is designed  by Nvidia.

[00:11:00] Nicholas Rossolillo: So massive growth for those. But again, we’re at an interesting inflection point in the economy now where for the next decade, analog chips, which for a couple of decades now have been kind of a sleepy, commoditized part of the semiconductor industry, are all of a sudden also expected to grow at a very, very fast pace.

[00:11:23] Nicholas Rossolillo: And again, a lot of that is being driven by electric vehicles, new automobile technology, and kind of parallel to that, a lot of similar technology used in the modern car also getting applied to industrial robotics, so manufacturing, food production, healthcare, and so on.

[00:11:41] Rebecca Hotsko: Okay. That was very helpful because I found that when you first dive into researching chip companies, there is so much to learn about how they work and which chip applies to what industry, which company makes what chip.

[00:11:57] Rebecca Hotsko: And so I’m glad that you kind of broke that down for us today, and I wanna dive into the expected growth of those different kinds of sub-industries a bit more because yeah, I found that chart super helpful to just see the growth. And so data centers are expected to actually grow the most by 2030 and beat even smartphone demand, which I thought was super cool.

[00:12:24] Rebecca Hotsko: And then automotive is expected to grow a ton as well. And then personal computing a little bit, and what was the other one there?

[00:12:34] Nicholas Rossolillo: Automotive. Yeah. Consumer electronics. Decent growth over the next decade. I mean, a market doubling in size over the next eight years is pretty impressive. But kind of one of the sleepier parts of the market.

[00:12:46] Nicholas Rossolillo: So yeah, pc, consumer electronics and internet service infrastructure, kind of the slowest moving parts of this industry. 

[00:12:56] Rebecca Hotsko: Right. So then that data centers one, you kind of touched on  that. That is driven then by AI demand essentially?

[00:13:04] Nicholas Rossolillo: It’s become twofold. So over the last decade, it’s been just general-purpose cloud computing, or oftentimes you’ll hear it referred to as HPC (high-performance computing). So these massive data centers operate huge applications, like Meta. The parent company for Facebook and Instagram operates massive data centers. I think this is actually a little-known fact, but Meta is not just a social media app. They actually do some really deep impressive engineering behind the scenes because they own their own data centers.

[00:13:36] Nicholas Rossolillo: And to operate something that can support 3 billion plus users around the world, with people using it constantly, every second of every place on the globe, you have to have some massive infrastructure. So over the last decade, it was just the general-purpose cloud. But now, all of a sudden, it’s AI, which oftentimes is just getting embedded into the cloud somewhere.

[00:14:02] Nicholas Rossolillo: So yeah, that data center market, I think it’s going to actually surpass. Some estimates still think the smartphone market will be the largest consumer of chips by the end of this decade. I really firmly believe that data centers and servers, maybe like we could break that down further into public cloud like Amazon AWS or Microsoft Azure, and then also companies building their own private cloud network as well, their own data center-based network for personal use.

[00:14:33] Nicholas Rossolillo: Those two things combined, I think, will outpace smartphones in the next, by the end of this decade. Some estimates are actually pointing that memory chip demand will actually get sold into data centers more frequently than they do smartphones as early as next year, as early as 2024. And then Logic chips, digital logic chips will catch up and, in total, surpass smartphones.

[00:14:59] Rebecca Hotsko: Wow. And so, okay, so the main chips for data centers are memory and logic you just said. 

[00:15:07] Nicholas Rossolillo: Correct. Yes, data centers are primarily logic chip-driven. So you have all this information flooding into these remote locations. You know that maybe there’s one somewhere in central DC, central Washington, central Oregon in the Northwest. You have all this massive information flooding into these things from the internet or maybe from a company’s private network. So again, it’s like the central nervous system. If you want to compare a computing system to the human body, there is so much information flooding these things, and that massive amount of data is only getting larger.

[00:15:45] Nicholas Rossolillo: As more devices get connected, more people get connected to these complex software systems and AI algorithms and whatnot, a massive amount of demand is now coming from things like AI, and that’s all going to happen in a data center somewhere.

[00:16:01] Rebecca Hotsko: Okay, so now I wanna get into your top pick.

[00:16:05] Rebecca Hotsko: And we talked about this before the episode, it might be helpful to break it down kind of by sub industries. So let’s start with cloud AI. Who do you think has the, or which companies do you think offer the best long-term prospects in this sub-industry? 

[00:16:20] Nicholas Rossolillo: One of them, I’ve already mentioned, is Nvidia, which in recent years I think has become a lot of people’s favorite semiconductor stock, hopefully because the business is awesome and not just because the stock price has rocketed higher, but I think that is the top pick and the market has really caught onto it.

[00:16:42] Nicholas Rossolillo: So even though by revenue, actual sales, Nvidia is not the world’s largest semiconductor company, it is, however, the largest semiconductor company by market cap. And again, it’s just being driven by this expectation that the data center and how much information needs to be crunched by these data centers is going to soar over the next five to 10 years.

[00:17:07] Nicholas Rossolillo: And Nvidia has built itself as not just a platform company, it’s another big tech company. Like we can think of Google or Amazon as a platform business that other businesses build themselves on top of. Nvidia is kind of that type of company now. It’s that important in the global economy. So as AI takes off, Nvidia has the market cornered. If you’re looking to build an AI system, you almost, almost – keyword “almost” – can’t design an AI system without Nvidia being somewhere in the mix at some point.

[00:17:43] Nicholas Rossolillo: So I think that’s the top pick. Expensive stock, ridiculously expensive stock, and it’s just because of this expectation that they’re going to gobble up the most of this market in the next five to 10 years. So I have a [00:18:00] trio of them, though, that make up my top pick here in data center and AI: AMD, again, a household name in years past, kind of the underdog to Intel, but they’ve really passed up Intel technologically in recent years. And then a third one that almost no one has heard of – Marvell Technology Group.

[00:18:21] Nicholas Rossolillo: So this company makes a type of processor called ADPU – a Data Processing Unit – and they made a string of acquisitions in the last four or five years to bolster their portfolio of different chip designs and IP that they can license out. And so they’re actually a key company when a company is trying to design high-performance computing for the data center. Marvell is a key ingredient in that work now as well.

[00:18:50] Rebecca Hotsko: Okay. I wanna jump back to NVIDIA for a second because I’m wondering, you said they kind of have the market cornered. Why is that? What is their competitive advantage that no other chip company can do or maybe are they trying to do and have failed?

[00:19:06] Nicholas Rossolillo: Actually, so we’re recording this a day after NVIDIA’s last earnings report. And on the earnings call yesterday, an analyst asked CEO, Jensen Wong, that question precisely, and he pointed out, you know, they do in fact have competition. They’ve always had competition. NVIDIA’s secret ingredient is the GPU, the graphics processing unit, which historically is for high-end video game graphics on a PC or laptop. They’ve figured out though, years ago, that the technology that their chips utilize can also be used as a computing accelerator. So a CPU, which in times past was dominated, a type of chip dominated by Intel, has its limits as far as what it can handle when it comes to these really, really complex pieces of software where there’s massive amounts of data. The CPU can only process so much of that data so fast, but the way the GPU is designed is it can kind of chop up this massive amount of data into smaller pieces and then process it in multiple threads all at once. And so it’s being used as a computing accelerator. You still need a CPU in a data center. But let’s say if you want to run an application, like let’s say chat, GPT, and it’s been trained on this incredibly huge set of information on the internet, let’s say general information found on the internet. You can’t just use CPUs, you have to use a GPU. And NVIDIA has been working on these things now for decades. And they’re way, way far ahead. Both AMD has GPUs and they’re also far ahead Intel technologically on these GPUs.

[00:20:54] Rebecca Hotsko: Okay, and so what happened to Intel, because I think I heard on one of your YouTube videos that they just kind of became complacent, but could you explain what happened with them and why aren’t they farther?

[00:21:07] Nicholas Rossolillo: I promise I won’t rant about Intel like I have on my YouTube channel. Intel’s problems really go back. I think we can go back a couple of decades if we really want to trace Intel’s problems today to the root source. So back in the early two thousands, a small company called Apple was working on this quaint little device called an iPhone, and they approached Intel and asked for help in designing a chip for it, and Intel took a pass. They said, you know, basically that’s a neat little device, but that’s not what we do. And so Intel completely missed the boat on mobile computing technology, logic chips, digital logic. They completely missed the smartphone market. And so they really kind of pigeonholed themselves basically in CPUs, which is one of the original types of logic chips. And they got pigeonholed in PCs and laptops and some data centers, CPUs. But again, as we just talked about, as these data centers get more complex and the software that needs to be run by them gets more complex, NVIDIA is actually ahead of all of these data centers. Data center operators say, “Hey, we need new equipment to run an AI algorithm.” They’re not going to Intel for the stuff they’re going to Nvidia. So Nvidia kind of helped create this market as well. So Intel has missed multiple shifts in computing technology. There are some other issues going on as well where I think they could have turned things around earlier, but they were just lazy. They got complacent and after the handwriting was on the wall that the industry had shifted towards mobile and then later on cloud, they weren’t quick enough to get up to speed with the times.

[00:23:05] Rebecca Hotsko: Okay. That is very interesting. I guess it just speaks to management and I guess why good management is so important as always.

[00:23:12] Rebecca Hotsko: And I wanna jump back to NVIDIA now for a second because, okay. Their competitive advantage, you mentioned they are just far ahead in the G P U technology and so, so there are a couple competitors though, catching up. How strong is that moat, would you say? 

[00:23:28] Nicholas Rossolillo: For Nvidia, I think at this point it’s pretty strong.

[00:23:32] Nicholas Rossolillo: An interesting thing about Nvidia is it’s not just a semiconductor company anymore. They’re also a software company, but maybe not the type of software that we might think of. I think we’ve all gotten hooked on software as a service (SaaS) over the last decade. AI requires high-performance computing and AI often requires a highly customized piece of software. It might be dedicated specifically to a business or maybe a specific segment within a business. There is no one-size-fits-all, and so Nvidia has done a fantastic job over the last couple of decades now developing this software that makes its chips, its GPUs, usable for the user for the individual or the company that’s buying them.

[00:24:19] Nicholas Rossolillo: So they have this very wide portfolio of software. Now, oftentimes that software is bundled together and given away for free with the GPU itself, but increasingly in the last few years they have been branching off into more advanced software that they can actually charge for. So again, in the last earnings call, just yesterday, they actually gave the most solid quantitative number to date on their software business, and they said it’s in the hundreds of millions of dollars. So that’s super non-specific. I don’t know if that means 200 million or if it’s closer to 1 billion in software revenue, but it’s becoming a very significant part of their company.

[00:25:04] Nicholas Rossolillo: And when you combine two things together like that very well-entrenched hardware that’s very far ahead of its peers technologically with a software business that makes it very easy for customers to implement that hardware and put it to use as quickly as possible in their day-to-day operations, you now all of a sudden have a company that is going to be very difficult to uproot from the very fabric of the economy.

[00:25:33] Nicholas Rossolillo: So I think Nvidia has a very, very strong moat at this point, and that’s reflected obviously in the sky-high valuation one-year forward earnings expectations of well over 40. That’s a very, very high price, even for a semiconductor company growing as fast as they are.

[00:25:51] Rebecca Hotsko: What is your view on the current valuation then today?

[00:25:54] Rebecca Hotsko: Because I think anyone listening and if they do their own research, could see that growth story and those prospects. But at the end of the day, if you pay too high of a price and that eats away your return, and so what do you think of the current price and valuation? 

[00:26:08] Nicholas Rossolillo: I’m sure you have a diverse base of listeners, so if someone’s looking for a quick trade to profit off of Nvidia is probably not what you’re looking for, but if you expect to be a business owner, you wanna own Nvidia stock like it’s, it’s your business for the long term.

[00:26:25] Nicholas Rossolillo: I think a dollar cost averaging plan still makes sense even at this point. There’s definitely gonna be some volatility this year because of that high valuation. A lot of growth is already baked into the price. But if you’re looking five, 10 years down the road and even beyond that, this company has a ton of potential.

[00:26:44] Rebecca Hotsko: Now I wanna move on to mobility, because this is a sector that a lot of our listeners probably know well. So who are the top leaders in this space, and who do you think has the best chance for our performance? 

[00:26:57] Nicholas Rossolillo: So old sleepy Qualcomm, I think is the obvious place to start here, right? This is almost as close as we’ll get to a monopoly in the technology industry.

[00:27:09] Nicholas Rossolillo: So Qualcomm has deep roots. The business was founded on mobile technology. In fact, it has two basic segments in which they report their financials. One of them is called QTL, Qualcomm Technology Licensing. It generates upwards of one and a half billion dollars in revenue every single quarter and generates earnings before tax over 70%.

[00:27:32] Nicholas Rossolillo: And this is just patents that they license out to companies that want to use Qualcomm’s mobile technology, which there’s not a lot of other places, AI or alternatives that you can go to. And so Qualcomm has this great baseline business that’s incredibly profitable, incredibly stable, and so I think this is a good place to start.

[00:27:55] Nicholas Rossolillo: Then they have this other segment, QCT, Qualcomm CDMA technology. That’s basically the chips. They design chips, and then when that chip gets sold primarily into an Android phone, they make some money off of that sale. So, smartphones, tablets, even some PCs, Qualcomm is doing a lot of work to get more of a presence in the PC and laptop segment.

[00:28:19] Nicholas Rossolillo: There’s a really good chance, be it Android or currently anyways, for the time being, an Apple iPhone, you’re gonna have a Qualcomm chip, some Qualcomm circuitry in there.

[00:28:31] Rebecca Hotsko: Interesting because I thought that Apple specifically was one of the largest customers for TSM. 

[00:28:38] Nicholas Rossolillo: Yes. This is where I think maybe, so we recently put together a semiconductor industry flow chart, and maybe I should mention that and we can share that here, because it’s a complicated web of different companies and different suppliers.

[00:28:54] Nicholas Rossolillo: So Apple designs its own chips using a company called Arm Holding. Currently, ARM is a subsidiary of SoftBank in Japan. SoftBank bought it back in 2016, so Apple purchases the patent or licenses, I should say, the patent from Arm to design its processors for its iPhones, its iPads, and now also the MacBook.

[00:29:16] Nicholas Rossolillo: So if you have a MacBook or a MacBook Pro with an M1 or now an M2 chip in it, that’s powered by ARM, and it’s a different business model. So Apple basically buys the license and the rights to the A-chip patent. They customize it to their needs, and then once they’re done designing it, they send it over to TSMC (Taiwan Semiconductor Manufacturing) to actually have the chip made.

[00:29:45] Rebecca Hotsko: Yeah, that was super helpful because I wanna ask you about Taiwan Semiconductor, where it kind of falls on your list and your thinking. It got quite popular when Berkshire bought it and I think among the value investing community, and then they later sold it. So I’m wondering what your thoughts are on TSM.

[00:30:04] Nicholas Rossolillo: Yeah, we should definitely start with Warren Buffet and Berkshire Hathaway buying $4 billion worth of TSMC, and then a mere three months later, they sold 86% of the stake that he just purchased. It’s a fantastic company. I will say that it’s a wonderful company. They actually port Intel.

[00:30:24] Nicholas Rossolillo: I think this just kind of illustrates how far behind they are. TSMC passed Intel years ago as far as manufacturing technology capabilities. So, Intel has lost its lead in designing chips. AMD has passed them up on multiple fronts in designing the chips. And then Taiwan Semiconductor has surpassed Intel in manufacturing technology, and they’ve manufactured a majority of the world’s most advanced chips, for smartphones and data centers primarily.

[00:30:53] Nicholas Rossolillo: So, TSMC is a wonderful business. I think Berkshire Hathaway ended up with $4 billion of  this in its portfolio, not because of Warren Buffet, definitely not Charlie. I think it was Todd Combs and Ted Wesley that more than likely made this purchase in the third quarter, basically summer 2022. And then a colleague of mine, Billy Duberstein, pointed this out.

[00:31:18] Nicholas Rossolillo: He was listening to Charlie Munger at the Daily Journal annual meeting in mid-February, and Charlie Munger hinted at why they probably invested. Munger basically said he hates businesses like TSMC, his words, he hates them because to stay ahead of your competitors, you’re constantly having to take your profits and reinvest them to develop new technology.

[00:31:40] Nicholas Rossolillo: So, instead of getting most of the profits back as a shareholder, you’re left with a fraction of the profits because most of the profits get reinvested to buy new equipment and develop new tech.

[00:31:54] Rebecca Hotsko: That will never change over time. Then essentially.

[00:31:59] Nicholas Rossolillo: Probably not. If we maybe say like, the human brain is the gold standard of computing efficiency. You know, you eat food, and our brains can do absolutely wonderful things with very minimal amounts of energy. Yes, computing technology will always have room for improvement. And then, of course, there’s this whole quantum computing thing that is probably still more than a decade away from being an actual commercially viable thing.

[00:32:27] Nicholas Rossolillo: So, there’s that too that will change the game. And you have this constant necessity to keep funneling money into capital expenditures. The machines needed to manufacture chips cost tens of millions, if not hundreds of millions of bucks. It’s just a never-ending cycle. So, TSM is an absolutely wonderful business, but I think a lot of investors should really understand that level of capital intensity needed for the company to remain a wonderful business.

[00:32:57] Nicholas Rossolillo: It’s not an easy industry to participate in.

[00:33:01] Rebecca Hotsko: And so will their main growth then going forward, be in smartphones then too for TSM? Or are they branching out and will they gain market share in those other growing industries? 

[00:33:13] Nicholas Rossolillo: It will be a smartphone, as well as a data center and AI-based business. They will get growth from both of those industries. They have begun expanding the facilities that they already broke ground on, I guess in Arizona. They’re building some new fabs in Arizona, and Tesla has apparently secured some supply from TSMC, but that’s probably more than likely the logic ship itself, not the analog chip. TSMC does not dabble in analog.

[00:33:43] Nicholas Rossolillo: They are a digital chip specialist, so kind of like the brains of the modern vehicle. That’s probably an area they could get some growth from as well.

[00:33:54] Rebecca Hotsko: Okay, so they aren’t directly competing with Nvidia for that market share then? 

[00:34:00] Nicholas Rossolillo: Yeah, that’s a good question. Nvidia is a customer, as is AMD. Basically, anyone who is a digital chip designer is more than likely a TSMC customer. Intel wants to compete in this market, so currently, TSMC and Samsung are the two biggest third-party foundries. So, if you design a chip, you’re basically going to one of those two, TSMC or Samsung. The problem with Samsung is that they also manufacture chips for themselves. So, if you have a smartphone chip design and you hand it over to Samsung, who also designs and manufactures their own smartphone chips, you have a bit of a conflict of interest there. TSMC is unique because they are the only third-party foundry that does not compete with their customers. They only manufacture, so this is a market Intel wants to get into. But, again, they will also have that issue where they design their own chips. So, anyone who gives a design to Intel to manufacture for them will have a built-in competitor there.

[00:35:08] Rebecca Hotsko: Right. So TSM seems like they have a pretty strong competitive moat and it would take a lot to catch up with them and many years at least, even for someone as big as Intel to even catch up to what they’re already doing.

[00:35:22] Rebecca Hotsko: So what are your thoughts on its current valuation right now, and I guess long-term prospects? 

[00:35:29] Nicholas Rossolillo: I think it is a decent value based on what I can see. There is an expected rebound, so currently, we’re in the midst of a slump of chip demand, especially for logic chips, digital chips for PCs and smartphones, which is a substantial part of TSMC’s business. However, I still think it’s a decent value because there’s an expectation that the market will recover in the second half of 2022.

[00:35:57] Rebecca Hotsko: Right. Yeah. It seemed like a few companies communicated in their guidance that they think the first half of the year is gonna be bad, and then they said the second half will be rosy.

[00:36:06] Rebecca Hotsko: I guess in terms of near term risks to valuations, who do you see these short term headwinds affecting the most? 

[00:36:15] Nicholas Rossolillo: The semiconductor industry is a peculiar place, as it is very forward-thinking. If we assume that the market tries to incorporate information three to six months, or perhaps a year, in advance when calculating a fair stock price, then the semiconductor market operates on a six- to twelve-month or longer timeframe. As such, when the bear market began in 2022, semiconductor investors were already anticipating the outlook for 2023 and the looming decrease in demand for PCs and smartphones, a year or more in advance. Consequently, many of the current economic and semiconductor-related issues are already reflected in the share price. Therefore, rather than considering what could go wrong, the focus now is on what could potentially hinder or delay the recovery of the chip industry.

[00:37:05] Nicholas Rossolillo: One area that is especially vulnerable is memory chips. Memory is highly price-elastic in logic memory. The price of a memory chip, which is a fundamental commodity in computing systems, will fluctuate dramatically depending on the market’s supply and demand. With the current slump in PC and smartphone demand, and firms trying to reduce supply, memory chip companies have been severely impacted. Micron, for example, has been hit hard. However, if the market becomes aware of a delay in the overall chip industry, it is the memory market that is likely to be the most susceptible and will detect any issues the soonest.

[00:37:46] Rebecca Hotsko: That makes a lot of sense. I forgot to ask you about two more industries, and I wanna get to that before we talk about more, I guess the relative valuation of all these stocks, I wanna make sure we have them all covered. First, is the automotive industry, because you mentioned how that’s supposed to be a growing industry with electric vehicles.

[00:38:04] Rebecca Hotsko: So which companies are expected to gain the most traction in this industry? 

[00:38:10] Nicholas Rossolillo: The obvious pick here is Texas Instruments, probably the stock that I should have purchased first 17 years ago. Texas Instruments is an absolute giant, with about three-quarters of their business dedicated to analog chips, making them ready for the upcoming boom in automotive technology and, to a lesser extent, industrial robotics. They have a broad portfolio of sensors, power chips, and anything analog. Texas Instruments is probably there. They also have a fantastic manufacturing base to work from, and they have some of the lowest costs in the industry – not just in manufacturing chips, but in manufacturing overall. They have done an excellent job of driving down their costs, resulting in ridiculously high profit margins. Therefore, I believe TXN is an excellent choice for the semiconductor industry, even though it is almost two decades since I should have bought it.

[00:39:07] Nicholas Rossolillo: I am beginning to warm up to this one. It was a commoditized business when I first purchased it many years ago, but today, with the emergence of electric vehicles and renewable energy, there is a new type of chip substrate called silicon carbide. Silicone is almost synonymous with a chip itself, and silicon carbide has carbon blended into the mix, making it able to handle much higher voltages and heat, making it an ideal type of chip for EVs and renewable energy. ON Semiconductor is pouring a lot of investment into silicon carbide (SiC), which is a really exciting development. Additionally, there is a small equipment chip company called Air Test Systems, in which I have a small position, that provides equipment that is essentially quality control for silicon carbide chips. I believe this is a compelling opportunity that could benefit significantly from a growing automotive technology market.

[00:40:06] Rebecca Hotsko: I feel like Texas Instruments is one that is not super popular. I don’t know, maybe that’s just what I read, but it doesn’t seem like it’s as popular as TSM or Nvidia and other ones like that, which benefit investors because typically then the price isn’t as high. It’s not run up. 

[00:40:23] Nicholas Rossolillo: You’re absolutely right.

[00:40:24] Nicholas Rossolillo: It’s fantastic, I think it’s a fantastic value right now. It’s one I have considered adding to my portfolio. Yeah. It’s just not one of those sexy, high, super high growth logic chip names like Nvidia. Or AMD, but I think that’s a real shame because they’re, they’re, they’re actually forecasting compound annual growth of 10% a year through 2030.

[00:40:49] Nicholas Rossolillo: There’s nothing wrong with average revenue growth of 10% a year. Plus Texas Instruments has this long standing policy of returning 100% of their free cash flow to shareholders. So all of a sudden you’re looking at an investment that is probably going to compound at, you know, a mid-teens percentage on average for the better part of a decade.

[00:41:10] Nicholas Rossolillo: That’s a pretty good long-term investment if you ask me. 

[00:41:14] Rebecca Hotsko: Yeah. And so we talked about so many different companies today and you made such a great case for all of them in these different industries where they can capture more market share. And I guess I’m wondering, given that and kind of the near term risks that could be ahead, which do you think are the best value right now and for a long-term investor?

[00:41:33] Rebecca Hotsko: Because we’re not looking to sell it in two years or something, but which ones do you think are the best price right now for a value investor to scoop up? 

[00:41:42] Nicholas Rossolillo: Yeah, Texas Instruments is compelling. I think in addition to that, I do like Qualcomm. Obviously, the smartphone market is not a super high-growth market like it was the last two decades, but there is still gonna be some growth there.

[00:41:59] Nicholas Rossolillo: In addition to that, Qualcomm is actually taking everything it does in smartphones and now applying it to the automotive industry. So they’re, they’re actually developing and getting some really good success selling their logic ships into automobiles. In addition to that, they do have a small software component as well attached to that auto business.

[00:42:21] Nicholas Rossolillo: I think Qualcomm is very cheap, and it’s kind of been left for dead here as of late because of the decline in smartphone sales. But that’s gonna come back eventually. And along the way, they’re getting some nice growth from automotive.

[00:42:39] Nicholas Rossolillo: I think AMD is still very compelling as well, even though it’s this darling from the 2010s, they completely turned their business around and overtook Intel on so many different fronts. But I do still like this company. They are so far ahead in CPU technology specifically for data centers. Intel still has like an installed base of over 90% for data centers for the cloud.

[00:43:05] Nicholas Rossolillo: So as these companies need to update the equipment, because chips eventually, they either wear out and need replaced, or the technology has just advanced so much that a company is forced to rip it out and replace it with something new as they rip out the old Intel hardware. I think there’s a really compelling argument to be made that AMD continues to gobble up market share at Intel’s expense in the next decade.

[00:43:35] Nicholas Rossolillo: So I think they’re not participating as much in the accelerated computing part of the market like Nvidia is, but the CPU space is going to grow, I think substantially because of data centers and AI. And so I think AMD is also a compelling value for the next decade as well.

[00:43:56] Rebecca Hotsko: And then what about, are there any companies that you talked about today that you love but not at this price? 

[00:44:04] Nicholas Rossolillo: I love Nvidia. I don’t love the price. That’s the most obvious one right now. But again, I think we’re at this particular point where even if the price, if the valuation, I should say, not the price, not the stock price, if the valuation feels uncomfortable, it’s really important to remember the semiconductor businesses. They have such farsighted vision because it’s expensive to manufacture chips.

[00:44:31] Nicholas Rossolillo: They’re laying plans down for two, three, five, 10 years down the road with their customers, with their partners. So we really have to look at valuation one year or more out to effectively value what a fair price is to buy a chip stock today. So I would say overall, there are a lot of very attractive, attractively priced, attractively valued companies in the semiconductor market at the moment.

[00:45:00] Rebecca Hotsko: That was excellent. I think I’ll end it there. And I wanna thank you so much for coming on today. I learned a ton from this conversation and I’m excited to watch more of your YouTube videos and keep up to date with this industry. But before I let you go, where can our audience go to learn more about you and everything that you do?

[00:45:17] Nicholas Rossolillo: So the primary outlet these days for all of our research is the YouTube channel “Chip Stock Investor.”

[00:45:24] Rebecca Hotsko: Perfect. I will make sure to link that in the show notes for our listeners. Thank you so much, 

[00:45:29] Nicholas Rossolillo: Nick. Yeah, thank you. Thank you for the invite. 

[00:45:33] Rebecca Hotsko: All right. I hope you enjoyed today’s episode. Make sure to follow the show on your favorite podcast app so that you never miss a new episode. And if you’ve been enjoying the podcast, I would really appreciate it if you left a rating or review. This really helps support us and is the best way to help new people discover the show. And if you haven’t already, make sure to sign up for our free newsletter, We Study Markets which goes out daily and will help you understand what’s going on in the markets in just a few minutes. So, with that all said, I will see you again next time. 

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