Equity Strategy | AI Chips Continue to Buoy Semiconductor Industry
With significant tailwinds at the back of the semiconductor space, we continue to advocate for sector leaders
Chief Investment Office21 Oct 2024
  • 2024 marks the start of the next semicon upcycle, driven by double digit growth in logic and memory
  • Strong surge in semiconductor M&A deals YTD reflects growing trend of vertical integration
  • Semiconductor industry will continue to reap benefits from AI
  • Strong capex trends and rising productivity are positive signs for profitability
  • Continue to favour semiconductor leaders on the growth end of the CIO Barbell strategy
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Paving the way for a stronger upcycle. After a challenging 2023, the semiconductor industry is on track to rebound strongly, driven by strong expansion in AI semiconductor demand. Marked by double digit growth in the logic and memory segments, the total semiconductor market is expected to grow 16% this year to reach USD611bn. The need for cutting-edge, AI-enabling graphics processing units (GPUs) remains stronger than ever, supported by strong demand among cloud hyperscalers and datacentre providers. The memory segment, which is key to the storage and access of information for datacentres, is expected to grow a stellar 77% this year as it rides on the AI-led datacentre boom. Consequently, semiconductor stocks have done well this year, with leading AI chip companies like NVIDIA rallying 174%, while the broader semiconductor industry rose 60%, outperforming both Big Tech (+33.8%) and the broader market (+17.2%) on a YTD basis.

M&A activity heating up. The semiconductor industry is seeing bustling M&A activity this year. As at end August, there have been a total of 44 deals in the semiconductor space, 33% higher than last year. More importantly, the total deal value of M&A transactions this year saw a 16x increase from last year (USD45.4bn vs USD2.7bn). This substantial rise in deal value was driven by two deals: Synopsys’ acquisition of Ansys (USD35b) and Renesas’ acquisition of Altium (USD5.9bn). These two transactions reflect a larger trend of semiconductor processor companies acquiring non-chip companies (e.g. software developers), to enhance their AI platforms and high-performance computing capabilities. NVIDIA announced four acquisitions this year related to embedded AI software, which will enhance their capabilities in compute unified device architecture (CUDA) and foster larger ecosystems around their GPUs. AMD also announced two acquisitions to bolster its server building (ZT Systems) and AI platform (Silo AI) capabilities. This trend of vertical integration shows how leading semiconductor companies are actively looking to expand their technological capabilities and capacity, and constantly positioning themselves to capture a larger end market. The adage “victory begets victory” very much applies to industry leaders in the semiconductor space.

Plenty of AI-driven growth ahead. Semiconductor chips are the foundation of modern technology, powering everything from smartphones and computers to medical devices and smart home systems. AI is no exception – AI models and applications require specialised semiconductor chipsets and integrated circuits to run, and the acceleration of AI adoption will see increasing demand for these chips moving forward. Considering AI is but in its nascent stages of development, it is reasonable to assume the bulk of its growth lies ahead of us. As the total addressable market (TAM) for AI grows steeply (projected to reach c.USD2.6tn by 2032), there will be a positive spillover effect on the semiconductor industry, which is seeing a rising proportion of its revenue come from AI-related end uses. Another long-term tailwind that will drive prospects for the semiconductor industry is robust global technology spending, which reached a staggering USD4.4tn in 2023. To put things into context, that amount is larger than the entirety of Japan’s GDP in the same year.

Robust capex and rising productivity. The AI-led growth wave in the semiconductor industry will be enhanced by robust capital expenditure (capex) from tech firms with deep pockets. Research and development will ensure a strong pipeline of chipsets from integrated circuit (IC) design companies while spending to diversify and shore up manufacturing capacity by foundries will ensure supply can keep up with growing demand. The sector’s healthy investment has also brought about a steadily rising level of productivity; revenue per 1,000 employees reached USD500mn in 2023, up from just USD60mn in the mid-1980s. This is a positive sign that profitability within the sector will remain buoyant.

Stay invested in semiconductor leaders. We continue to advocate for exposure to the semiconductor space, particularly the sector leaders, to be on the growth end of the CIO Barbell strategy for their structural criticality to modern technology and ever-expanding addressable market. The industry has and will continue to benefit from the transformative effects of AI for a long time to come. Revenue-per-share for the industry is at multi-year highs, reflecting its strong growth trajectory. On a growth-adjusted basis, valuations for semiconductor players remain undemanding; the two-year average (2024 and 2025) PEG ratio for the industry is a substantial 1.7x lower than global equities’ 2.9x. As the hype around AI gradually fades, it is useful to consider Amara’s law, which states that we often overestimate a technology's short-term effects while underestimating its long-term impact when considering the investment case for semiconductor players and AI beneficiaries. While short-term market fluctuations may be tempting to react to, the true attractiveness of semiconductor and AI investments lie in their potential for sustained, long-term growth.

Figure 1: Semiconductors on track for a strong 2024

Source: World Semiconductors Trade Statistics, Semiconductor Market Forecast Spring 2024, DBS


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