Everyone’s favorite business in the stock market, technology, has gone the way of the dodo. Oil and value stocks are all the rage.
But one part of technology — semiconductors — is vital not only to the stock market’s tech sector, but also to the global economy and industries from cars to computers. Growing, moving and manufacturing chips and chip makers will remain crucial.
I recently sat down for the Six Five Summit with Arvind Krishna, CEO of IBM IBM,
During the conversation, he shared an observation about the close correlation between the semiconductor industry and GDP growth.
When technology, and especially semiconductor companies, grow, GDP grows. And technology growth is nearly 100% dependent on semiconductor growth. So, as we enter what looks like an extended winter for tech and growth stocks, it seems like it would be prudent to keep a watchful eye on semiconductor growth.
Although forecasts vary, McKinsey projects the growth of the semiconductor industry to become a trillion dollar industry by 2030 based on what the consultancy estimated at 6% to 8%. annual growth and about 2% annual price growth – it all depends on the return of balance in supply and demand.
Several trends in semiconductors merit investors’ attention, from the persistent supply chain issues that have played a significant role in today’s unprecedented inflation to the profits and growth of major semiconductors like Intel INTC,
and Taiwan Semiconductor TSM,
Perhaps one of the most important trends to pay attention to is the semiconductor ecosystem as a whole and what is driving a wave of new entrants into chip manufacturing, from PCs to servers. In particular, Arm’s emergence as an enabler of new entrants into semiconductor manufacturing is creating competition for incumbents like Intel and AMD, which have long enjoyed the unique advantage of holding the keys to x86. , which make up over 90% of PC chips, and most server chips as well.
Packaging arms around the world
Antitrust issues ended the deal with Nvidia to acquire Arm. But the concerns, which came mostly from some of Arm’s biggest adopters and licensees, are a strong indicator of the expected role Arm will play in the future in powering everything from smartphones to supercomputers.
Last week at WWDC, Apple AAPL,
announced its M2 Macs, built on the company’s in-house silicon. Early iterations of the company’s Arm processor were problematic. Still, Apple has made huge strides in its chipmaking efforts and is starting to find its footing by helping Arm reach nearly 10% of PC volume.
Qualcomm’s PC business is still in its infancy, but it’s worth noting that the company has acquired a wealth of talent and intellectual property with its acquisition of Nuvia. Qualcomm has also made a big bet on Arm with its Windows offerings on Snapdragon. In early 2023, the first Nuvia-based chips that will take advantage of Arm and will likely find their way into designs such as Lenovo, Microsoft MSFT, etc.
Samsung and other OEMs already run Windows on Arm PCs.
Arm is also seeing strong adoption on the data center and server side. AMZN from Amazon,
AWS was the first hyperscale cloud provider to make a big bet on Arm with its Graviton instances. At this point, Arm represents 20% of AWS server deployments. A Trend Force report indicated that by 2025, Arm would have around 22% of all server deployments, a huge market share in just a few years. The success of AWS has undoubtedly been a catalyst, alongside a growing trend to disaggregate workloads from monolithic designs of other hyperscalers such as Microsoft Azure, Google GOOG,
and Oracle ORCL,
all seek to make local silicon.
The fate of AMD and Intel
As you read about space entrants, it’s easy to think this could be bad for AMD and Intel. And, of course, to varying degrees.
Intel has had its share of challenges trying to convince the market that it has a strategy that will take it back to its glory days. I tend to think the market has been remarkably tough for Intel, but that comes from a series of historical events that may necessitate a “show us, don’t tell us” mentality among investors.
That said, CEO Pat Gelsinger has been aggressive in reclaiming Intel’s best version of itself, and it’s done so through expansion. Arm will be part of it.
The Intel Foundry Service (IFS), which I believe has an important role to play in addressing long-term supply chain issues, will be part of the Arm-based manufacturing solution. The company’s IDM 2.0 strategy also pointed to a future where its hybrid silicon could contain not only x86, but also chiplets containing x86, Arm and Risc-V.
At AMD’s recent Investor Day presentation, the company shared its new $300 billion Total Addressable Market (TAM) as it continues to diversify its business. Intel, Nvidia and Qualcomm have massively expanded their TAMs, based primarily on continued diversification into new markets while benefiting from strong demand growth and price elasticity for chipmakers.
Much of the company’s strategy seems to hedge against its continued capture of Intel’s market share. Yet its recent $35 billion acquisition of Xilinx also deepens its roots in Arm, adding growth and diversification from just x86.
Winners and losers
The short answer is yes, which is precisely why incumbents migrate to an Arm leverage position.
If Intel can really get its foundry business humming, it should be a winner in the space — even if that surprises some people.
Hyperscalers will all be able to build silicon that meets their customers’ needs using Arm, giving businesses more choice. They will certainly result in net gains for companies like AWS, Google, Microsoft, Oracle and Alibaba BABA,
Apple has vertically integrated and made chip manufacturing a skill. There was reason to be skeptical, but at this point the company is building quality products that meet the needs of its users, and can increase its margins and control its supply chain even better.
In the PC space, Arm will create more variety and variants. This will stimulate competition and give OEMs more options to differentiate themselves. I like Qualcomm here because the company knows how to build and license chipsets perhaps better than any other company in the world – Nuvia-based solutions will be key to making that happen.
And, of course, the biggest winner of all is Arm. As the company prepares to go public, it has nothing but solid growth prospects and a list of world-class clients backed by its intellectual property.
“Protected Campaign Line in Budget”
In short, what I think IBM’s Krishna was trying to reflect in his comment on the semiconductor/GDP correlation was twofold. First, any slowdown in semiconductor growth should set off big red flags for investors and the economy as a whole. And second, the key to overcoming much of the expected economic contraction will depend on continued investment in technology infrastructure and software that enables businesses to operate more efficiently and increase productivity.
Perhaps his most profound statement during our interview was: “Technology is the most protected item in the budget”, in reference to the macroeconomic challenge and how the best companies intend to adopt a posture more defensive while remaining focused on growth and innovation.
Almost everything runs on semiconductors – and almost every innovative tactic we can adopt to optimize business and consumer activity will depend on semiconductors. If semiconductor growth accelerates, so will the economy – and we should stick with that, whether it’s x86, Arm, or whatever instruction set is available.
Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advice or consultation to Nvidia, Intel, Qualcomm and dozens of other companies. Neither he nor his firm holds any stake in the companies mentioned. Follow him on Twitter@danielnewmanUV.