(Veteran tech columnist Jon Markman publishes Strategic Advantage, a guide to investing in the great digital transformation of business and society. Click here for a two-week trial.)
An escalating trade war with China and a global pandemic in 2020 could have been devastating for semiconductor companies — yet it didn’t turn out that way.
What pessimists missed this year was the sheer size of the transformative digital wave, and the secret deals that kept Chinese markets open to American vendors despite public trade frictions.
Those dynamics are likely to accelerate in 2021.
When the Trump Administration in 2019 blacklisted Huawei, the world’s largest telco equipment company, many American semiconductor leaders were understandably worried. The Chinese behemoth had become an $11 billion customer. Those sales seemed lost.
One year later, purchases from American firms were up 70%, boosted by stockpiling and loopholes. And The Financial Times recently reported that several American companies won undisclosed exemptions to continue supplying Huawei.
With less well-connected firms locked out, the Chinese trade war became a net positive for American market leaders. And it could not have come at a better time.
The computing, manufacturing, automotive and telecommunications sectors are being transformed with new digital technologies.
At a $322 billion market capitalization, Nvidia (NVDA) – Get Report isn’t only the largest American semiconductor firm by that measure, it is also in the best position. Managers at the San Jose, Calif.-based company built a vertically integrated, best-in-class, graphics-based artificial intelligence platform. Nvidia’s high performance GPUs are transforming modern computing with AI.
Data center sales for the fiscal third quarter surged to $1.9 billion, up 162% year-over-year. Overall revenues shot up 57% to a record $4.7 billion, with a gross margin of almost 63%. Net profits reached $1.3 billion, or $2.12 per share.
Meanwhile, NXP Semiconductors (NXPI) – Get Report, Analog Devices (ADI) – Get Report and Ambarella Inc. (AMBA) – Get Report are ready to take advantage of the transition to smarter manufacturing and next generation vehicles. These trends are inextricably linked and certain to get a lot of traction in 2021.
Automakers have resisted moving their fleets to electric propulsion because their aged factories will need expensive retrofitting. However, as Tesla’s (TSLA) – Get Report EV lead widens, they are finally biting the bullet.
Ford (F) – Get Report managers announced in November the acceleration of the company’s $11.5 billion electrification rollout. A week later, Volkswagen executives revealed an $86 billion plan to invest in self-driving technology and to retrofit factories for EV production.
Investors should have been tipped off in October when NXP managers noted especially strong demand from its automotive customers. The Dutch company makes mixed signal processors that run the computer networks found in next generation vehicles. It’s the same gear that has become the connective tissue for smart factories needed to produce the EVs.
The strength in those markets is also driving sales at Analog Devices. Its integrated circuits convert elements of the physical world into digital signals. The Norwood, Mass.-based company has a loyal following among first-tier automotive and industrial customers looking for silicon that can reliably turn temperature, sound, speed and light into electric signals that can be processed by modern computing systems.
The company reported in November that fourth quarter revenues grew 6% to $1.5 billion and gross margins increased by 170 basis points to 67%. Profits rose 36% to $462 million, or $1.04 per share. More importantly, margins grew across all of the company’s key markets, a trend that should continue as Analog managers integrate the pending acquisition of Maxim Integrated Products (MXIM) – Get Report, a competing business.
Ambarella Inc. used to be best known for the video processing found in GoPros but managers recognized in 2015 that to grow, the company needed to move beyond expensive toys. So they invested $250 million designing a cutting-edge computer vision chip that included both proprietary processing and AI.
These new chips won favor in 2018 with smart security and robotic system manufacturers. Fermi Wang, the company’s chief executive officer, said in November that Ambarella recently secured several new Asian automotive customers for its computer vision processors.
Although third quarter revenue fell 17% to $56 million versus a year ago, gross margins rose 470 basis points to 62%. With new Asian customers on tap and a big new business vertical ahead, the future looks bright for the $3.2 billion market capitalization company
Taiwan Semiconductor Manufacturing (TSM) – Get Report operates the world’s largest semiconductor foundry. For a fee, the Taiwanese company manufactures chips designed by firms like Apple (AAPL) – Get Report using its state of the art manufacturing processes.
It’s a great business. Managers reported in October that third quarter revenues rose to $12.1 billion, up 29% versus a year ago. Gross margins were steady at 53% and profits were $4.7 billion, or $0.90 per share.
That business will grow as the chip business moves away from off-the-rack processors and toward custom-designed silicon with integrated AI for specific applications. Apple recently released new laptop computers with processors custom designed in-house and manufactured by TSM.
Nvidia, NXP Semiconductor, Analog Devices, Ambarella and TSM are uniquely positioned for 2021. They have become important players in the digital transformations that are ongoing at data centers, smart factories and among automakers. They also benefit from geopolitical posturing that rewards scale.
Growth investors should consider buying the shares into any weakness.